Value added tax (VAT) has never been the most straight forward of taxes to understand and although the are many benefits of VAT registration, many businesses dread the thought of having to register for VAT and file quarterly VAT returns. Ecommerce VAT registered businesses are no exception to that rule. In fact ecommerce VAT is often complicated further by the relative ease with which they are able to trade with customers and suppliers overseas.
Unfortunately 2021 will not be remembered as the year where those complications were forgotten. In fact 2021 is going to be a somewhat transitory year for VAT and in particular ecommerce VAT.
Throughout the year we will have to deal with the impact of 2 significant updates to the way ecommerce VAT works. The first set of changes have been in the pipeline for some time and were planned prior to the UK’s decision to leave the EU (we can’t blame Brexit for everything).
Then of course Brexit has resulted in a second set of changes that have also come into force and will need to be digested and understood by UK ecommerce VAT registered businesses.
In this article we will look at the changes to VAT in 2021 and in particular how they will impact our ecommerce VAT registered clients.
Throughout the article we will tend to focus on those who sell goods rather than services. We will also first look in some detail at how the changes will impact those operating under a dropshipping model before we look at the wide sweeping changes.
UK Changes v EU Changes
As previously mentioned, some of the changes to the ecommerce VAT system we are seeing in 2021 were planned long before any decision was made on Brexit. Others are a direct result of the UK’s decision to leave the EU
The changes planned prior to Brexit were designed to directly target ecommerce businesses and were sweeping changes planned across the EU and UK. The UK still went ahead with the changes on 1st January 2021 but Covid-19 has somewhat complicated the matter further as it forced the EU to delay their implementation of the new rules until 1st July 2021.
The result is that we have a 6 month period of differing systems to navigate plus we will need to learn some rules only for them to be replaced in 6 months time.
The good news is that the first 6 months of the year should be the most difficult with things getting slightly easier in the second half of the year as that’s when the EU will introduce its one stop shop (OSS) which can be utilised by UK sellers who sell into the EU. Essentially this will allow UK sellers to register for VAT in one EU country but sell into many. Unfortunately this wont apply until 1st July 2021 and prior to this your business may need to register for VAT in every EU country it sells into.
Below we have set out how this may impact a variety of different businesses but if your setup hasn’t been covered then feel free to get in touch.
For our ecommerce clients who operate under a dropshipping model there are some important changes to take note of.
The change that will impact the most ecommerce businesses is that from1st January 2021when dropshipping goods from outside the UK (including the EU) where the customer is based in the UK, VAT will now be payable at the point of sale. Previously when dropshipping from third countries the VAT was usually collected at the point of entry which usually involved the customer paying the VAT charge where necessary.
Now if you operate an online store such as shopify then you will need to account for VAT in the sale price. Essentially dropshippers will face the choice of increasing their prices by up to 20% or taking a large hit to their profit margin. For some products where the cost cannot be passed onto the customer and the margin is already low this may create products that just aren’t viable for dropshipping anymore.
There have also been changes to the VAT registration requirements. Previously dropshippers followed the same registrations requirements and thresholds as other businesses (VAT taxable turnover above £85,000) in the trailing 12 months results in compulsory registration). As most dropshipping arrangements were outside the scope of VAT many dropshippers were able to avoid UK VAT registration altogether.
Since 1st January 2021 any UK or Overseas businesses making sales directly to UK customers in this way will automatically need to register for UK VAT however this does not apply to those selling via an online marketplace like Amazon, Ebay or Etsy.
Below we have summarised a few different examples and how the VAT now works in 2021. The table shows the impact on dropshipping businesses depending on where the goods are being shipped from and where they are being shipped to. It considers the ecommerce VAT implications in both the UK and the EU but note that it does not consider requirements outside of this for rest of world countries.
|From - To||UK VAT Treatment||UK VAT Registration||EU VAT Treatment||EU VAT Registration|
|UK to UK||If registered then charge VAT at the applicable rate. No changes to previous rules||The usual £85,000 threshold still applies to UK businesses but NON UK businesses need to register immediately||N/A||N/A|
|UK to EU||Sales are zero rated and are known as exports (zero rated supplies will count towards registration threshold||The usual £85,000 threshold still applies to UK businesses but NON UK businesses need to register immediately||Until 30th June VAT is payable on import by the importer on record (usually the customer). From 1st July VAT payable at the point of sale and should be charged at the local rate applicable to the customer||Until 30th June registration needed in each EU country you transact in. From 1st July only need to register in 1 EU country and submit a One Stop Shop (OSS) return|
|UK to ROW||Sales are zero rated and are known as exports (zero rated supplies will count towards registration threshold||The usual £85,000 threshold still applies to UK businesses but NON UK businesses need to register immediately||N/A||N/A|
|EU to UK||Must charge VAT at the applicable rate at the point of sale||All businesses making these type of transactions must register for UK VAT (this Includes UK businesses who are under the usual registration threshold||Reclaim the VAT on your EU return and charge 0% EU VAT||Until 30th June registration needed in each EU country you transact in. From 1st July only need to register in 1 EU country and submit a One Stop Shop (OSS) return|
|EU to EU||No VAT due||No need to register||This currently depends on the exact circumstances. We would suggest you contact us in this situation.||Until 30th June registration needed in each EU country you transact in. From 1st July only need to register in 1 EU country and submit a One Stop Shop (OSS) return|
|EU to ROW||No VAT due||No need to register||Charge 0% as export of goods are zero rated|
|ROW to UK||Must charge VAT at the applicable rate at the point of sale||All businesses making these type of transactions must register for UK VAT (this Includes UK businesses who are under the usual registration threshold||N/A||N/A|
|ROW to EU||No VAT due||No need to register||Until 30th June VAT is payable on import by the importer on record (usually the customer). From 1st July VAT payable at the point of sale and should be charged at the local rate applicable to the customer|
|ROW to ROW||No VAT due||No need to register||N/A||N/A|
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EC Sales List Removal
The EC sales list was a document filed by VAT registered EU businesses trading within the EU to ensure cross border sales were registered correctly. Since the UK is no longer part of the EU, this form will no longer be used by UK businesses. Our ecommerce VAT registered clients may be glad to see the back of this administrative burden.
The deadline for the final EC sales list submission for sales made into the EU prior to 1st January 2021 was 21 January 2021.
Low Value Consignment Relief Removed
The low value consignment relief (LVCR) previously meant that any goods imported into the UK with a value less than £15 were exempt from both VAT and customs duty. Goods valued between £15 and £135 were subject to import VAT but were still exempt from customs duty.
Since 1st January 2021 the LVCR has been removed and and goods entering the UK with a value up to £135 will now be subject to domestic VAT rather than import VAT. The main result of this is that VAT will now be collected at the point of sale rather at the point of import like it was previously.
In reality this will involve the store or online market place collecting VAT when the sale is made. For our clients who operate their own store where goods are shipped from outside the UK this means you will need to collect VAT at the point of sale and can no longer rely on VAT being collected at the point of entry for goods with a value under £135.
For many sellers this will leave them with the difficult decision of increasing prices by 20% and becoming less competitive or swallowing the new VAT liability themselves and seriously impacting the profit margin.
EU Distance Selling Thresholds
Previously each country within the EU had it’s own distance selling threshold which meant that UK sellers sending goods to customers in the EU didn’t need to register for VAT in that country until they exceeded the threshold.
From 1st January 2021 these thresholds no longer apply to UK to EU sales and instead goods sent to the EU from the UK will be subject to VAT at the point of import which usually involves the customer paying the liability before the goods are released to them.
It is important to make customers in the EU aware of this as a surprise ecommerce VAT charge or delays are likely to reflect badly on your business.
Postponed Import VAT Accounting
Previously when a business was importing goods from overseas, the business would pay import VAT at the point of entry. Assuming the business is VAT registered then it would then be able to reclaim this by including the amount on the next VAT return.
From 1st January 2021 postponed import VAT accounting has been introduced which can be used in situations where:
- The goods have been imported for business use
- The business has an EORI number and displays this on the customs form
- The business has a VAT number and displays this on the customs form