From the start of 2021, HMRC introduced a number of changes to the rules of VAT for ecommerce and how businesses need to account for it. Some of these changes are a direct result of Brexit and any business making sales or deliveries of goods to consumers in the EU are likely to be impacted.
Some of the changes made were planned by the EU before the UK’s departure. The EU was set to simultaneously introduce their ecommerce VAT changes at the start of 2021, however, due to the coronavirus pandemic, the EU postponed these changes until 1st July 2021. The UK changes still went ahead and were brought into effect on 1st January 2021.
Why is VAT changing?
As the UK’s Brexit transition period came to end on 31st December 2020, there were several changes that needed to be put in place for businesses selling goods to consumers in the EU. The changes were also introduced to improve and simplify processes, coincide with the removal of the low value consignment relief for goods, and to help reduce online VAT fraud, which HMRC estimate costs the UK £1.5 billion per annum in lost tax revenues.
The Ecommerce VAT Changes
Three fundamental changes were introduced to the UK ecommerce VAT regime, changing the accounting and reporting requirements for online marketplaces, online sellers, and businesses with a direct-to-consumer channel. These key changes include:
Removal of Low Value Consignment Relief (LVCR)
Currently, the LVCR means that goods valued at £15 or less are not subject to UK import VAT. The LVCR has now been withdrawn and all imports will be subject to UK VAT at the relevant rate. This now means that UK VAT is to be charged at the point-of-sale on B2B and B2C goods if the imported sale is valued at less than £135.
For customers who are not VAT registered, the seller must register for and charge UK VAT. For those who are VAT registered, they should provide their VAT registration number to the seller and account for VAT themselves.
Postponed VAT Scheme for imported goods
The postponed VAT scheme for imported goods has been introduced as a result of Brexit. Previously, import VAT needed to be paid before goods could clear customs, however, this no longer needs to be paid upfront. If you import goods into the UK, you will now declare the import VAT on your UK VAT return rather than paying upfront and reclaiming on your VAT return.
Distance selling EU VAT Thresholds
The distance selling EU VAT threshold will not apply for UK ecommerce business selling goods to EU consumers. They will become UK exports and imports into the UK by the customer. For EU businesses that sell goods to UK consumers, they will need to register for UK VAT.
From 1st July 2021, the EU ecommerce VAT changes will come into place and UK businesses will not have to directly register in each EU jurisdiction to sell physical products to EU consumers. They will instead be able to make use of the new Import One Stop Shop (IOSS) scheme which will enable them to file a single VAT return for the whole of the EU, only requiring a VAT registration in one EU country to facilitate this.
The aims of these reforms/what does this mean?
The main aims of these reforms include:
- Ensure that goods from the EU and non-EU countries are treated in the same way so UK online and high-street retailers are not disadvantaged by competition from VAT free imports.
- Improve and simplify processes of VAT collections on imported goods and address overseas sellers who fail to pay the right amount of VAT on sales of goods that are already in the UK at the point of sale.
What do the changes mean if you have an online store?
If you have an online store and sell imported goods to consumers in the UK, you need to start accounting for UK VAT at the rate of 20%. So, if you currently sell something for £12, it will effectively be £10 + £2 VAT. To maintain the profit margin, you made on products before the start of 2021, you will need to increase your prices by 20% as the end customer generally only sees the final selling price.
What do the changes mean if you sell on an online marketplace (OMP)?
If you sell products via an online marketplace such as Ebay or Etsy and your goods are imported from outside the UK to consumers in the UK, the OMP will be responsible for charging and collecting the VAT on your behalf. On your UK VAT return, this amount will be a zero-rated supply to the OMP.
Get expert Ecommerce VAT advice
If your business has not yet made changes in line with the new ecommerce VAT reforms and is not managing the changes effectively, it can result in fines and your imported goods being blocked at customs. Online trade within the UK and the EU has changed and is continuing to change throughout 2021, so it’s important to be organised and prepared to allow your business to continue trading effectively.
Here at Elver E-commerce, we provide accounting and business advisory services to help keep your online business running smoothly. Whether you are a UK or EU seller, or sell goods via an online marketplace, we can help you navigate the ecommerce VAT reforms and manage VAT calculations and filing obligations. With our e-commerce accounting packages, you can have the peace of mind your business is compliant with the new VAT legislation, so that you can manage your business effectively and drive it forward.