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New EU VAT changes will severely impact UK eCommerce businesses

  • New EU VAT changes came into force on 1st July 2021, meaning any packages from outside the European Union (EU) will become 21% more expensive.
  • New tax rules will significantly impact UK e-commerce businesses and EU online shoppers who frequently purchase outside the EU.
  • Items imported into the EU with a value under GBP 15 (EUR 22) are no longer exempt from VAT.
  • Most UK businesses are not prepared for the tax changes.
  • 17% of UK eCommerce businesses are no longer trading with the EU due to added costs.
  • Businesses selling goods from the UK and Northern Ireland (NI) to the EU can opt for the One-Stop-Shop (OSS) and Import One Stop Shop (IOSS) Union scheme.
  • Labour Party leader Sir Keir Starmer says that UK Prime Minister Boris Johnson has taken Northern Ireland as fools when negotiating the Northern Ireland Protocol.

New EU tax rules came into effect on 1st July 2021, adding 21% to any packages from outside the EU. Not only does the new tax rule impact UK e-commerce businesses, but also those who frequently shop online internationally.

Online stores such as AliExpress and Etsy are hugely popular amongst international buyers due to their famously low-cost items. However, both of these online stores are located outside the EU yet receive frequent orders from The Netherlands. As a result, EU countries will be required to pay significantly more when buying from these e-commerce businesses.

Both AliExpress and Etsy have stated that they will display VAT at the checkout stage, but popular UK online clothing retailer ASOS says they are undecided of what approach to take.

The EU stated that the new tax rules would generate around EUR 7 billion for all 27 member states each year.

Another significant change to the tax rules, which will particularly impact UK e-commerce businesses, is that items imported into the EU with values under GBP 15 (EUR 22) are no longer excluded from VAT. Many companies previously took advantage of the threshold and used it as an opportunity to avoid tax. As a result, all goods sent directly from the UK to EU consumers, both through online marketplaces and direct sales, will have the local VAT rate in the buyer’s country applied.

EU tax changes

Most UK businesses are not prepared for the new EU tax changes

On the approach of the EU’s new tax rules on 1st July 2021, Alison Horner, Partner and Head of Indirect Tax at MHA MacIntyre Hudson, stated that many UK e-commerce businesses were unprepared for the changes.

UK businesses that sell to the EU are required to register for VAT and face substantial VAT compliance registration fees if they have not done so by the deadline date of 1st July 2021. The unpreparedness from UK businesses either came down to lack of awareness or waiting for last-minute registration due to uncertainty of the new tax rules.

Ms Horner acknowledged that UK businesses had faced numerous challenges over the past year, from COVID-19 restrictions to costly post-Brexit tariffs and supply chain issues. In addition, the EU’s new VAT rules are yet another obstacle for UK businesses to conquer.

The EU’s tax changes attempt to crack down on fraud relating to undervalued goods resulting in businesses avoiding Import VAT and Duty into the EU. This issue has been an ongoing concern for the EU, which saw the bloc fine the UK GBP 2 billion in 2017 for failing to take adequate action on import undervaluation.

Cross-border e-commerce is set to accelerate to USD 1 trillion in 2022, hence why the EU has been eager to crack down on lost revenue, forcing UK businesses to confirm VAT at the point of sale. With cross-border commerce set to see such rapid growth, there is the potential for businesses to still receive a substantial return on investment (ROI) despite the new tax rules.

To alleviate the prospect of UK businesses having to register for VAT across potentially all 27 EU member states, the EU has introduced two schemes – the Import One Stop Shop (IOSS) and the One-Stop-Shop (OSS).

The Import One Stop Shop (IOSS) and the One-Stop-Shop (OSS) schemes

The IOSS and OSS schemes mean businesses can complete one tax return for all EU sales, making the process much more manageable. There is also the Mini One Stop Shop (MOSS) which exclusively deals with digital services and was launched in 2015.

UK businesses that hold stock outside the EU can rely on the IOSS for sales of up to EUR 150 and need to assign an EU fiscal intermediary to process and submit monthly returns to cover all sales within the bloc.

Alternatively, British companies that hold goods in the EU for onward fulfilment to their EU customers can use the OSS and register for VAT in one EU country to streamline their VAT obligations. There is no need to employ an intermediary, with OSS tax returns submitted quarterly for business-to-consumer (B2C) sales in the bloc.

The above rules also apply for businesses selling goods from Northern Ireland to EU consumers that surpass the distance selling threshold. The threshold was previously EUR 35,000 to EUR 100,000 depending on the EU member state but is now a single figure of EUR 10,000. Small to medium-sized enterprises (SMEs) who sell below this threshold can pay VAT to the country where the seller is located rather than the consumer.

Both the IOSS and OSS were established during April 2020 and can all be managed via an online portal. The scheme has been used by e-services sellers, including music, apps and games and has now been rolled out to sellers of all online goods.

Whilst these schemes should prove to be more manageable for UK businesses in the long term; many have experienced issues over the past week. Many companies rushed at the last minute to register online for the scheme, leading to a backlog in approvals.

Furthermore, for any UK business unable to register for the IOSS scheme, there is the potential that goods could experience lengthy delays at customs, leading to a negative customer experience which could impact brand reputation.

17% of UK businesses have stopped trading with EU

The Institute of Director (IoD) recently conducted a survey for the Financial Times and discovered that 17% of UK businesses had ceased trading with the EU. The news follows reports from March 2021, highlighting that one in five UK businesses had temporarily stopped trade with the EU as a result of Brexit related disruptions.

The survey, which covered 651 businesses, also reported that a third of UK companies trading with the EU had experienced significant financial losses since post-Brexit rules came into force on 1st January 2021.

Although it has now been more than six months since the end of the Brexit transition period, it is clear that many UK firms are still struggling with the impact of Brexit.

A quarter of businesses that trade with the EU have also been forced to relocate staff members to avoid Brexit red tape. Two-thirds of companies also believed that new UK customs controls would have harmful impacts on trade once implemented.

More than a quarter of businesses said Brexit had created issues with hiring staff, with 17% struggling to secure highly skilled staff and 10% with low skilled staff.

17% of respondents said Brexit made them more likely to invest in their businesses, whilst 15% said it made them less likely.

SMEs have struggled the most when attempting to navigate post-Brexit procedures concerning imports and exports, primarily due to confusion with the new rules.

As a direct result of Brexit, most UK businesses have experienced supply chain delays, mounting paperwork and additional costs on imports and exports.

Sir Keir Starmer says Boris Johnson has taken Northern Ireland as fools

During his first visit to Northern Ireland as Labour leader, Sir Keir Starmer stated that UK Prime Minister Boris Johnson took the people of Northern Ireland as fools when negotiating the Northern Ireland protocol.

Sir Starmer argued that Mr Johnson was deliberately unclear when discussing the protocol, including numerous new checks on goods crossing from Great Britain to Northern Ireland.

The UK sparked outrage amongst the EU when deciding to extend its grace period on goods sent between the UK and Northern Ireland, a move which the EU deemed as unlawful. The EU threatened legal action against the UK and will proceed with such action if the UK fails to provide a satisfactory solution.

The EU has since urged the UK to agree to a Swiss-style veterinary agreement to end the disagreement concerning chilled meats moving between the UK and NI. The row has since been labelled as the ‘sausage war’. A long-term solution to evade Sanitary and Phytosanitary (SPS) checks for fresh meat and plant products would be similar to the EU’s current agreement with Switzerland.

European Commissioner Maros Sefcovic recently said the EU’s most significant challenge post-Brexit was building trust with the UK and realigning its relationship. Mr Sefcovic confirmed that proceeding with legal action was not the EU’s preferred option and is committed to finding pragmatic solutions.

Britain’s ambassador to the EU, Lindsay Appleby, stated that the EU is too focused on a small number of specific problems relating to the NI protocol, while the UK considers a broad and significant range of issues.

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