This is a guest post from AVASK Accounting & Business Consultants
The clock is ticking faster than ever before: in less than three weeks, the United Kingdom will officially leave the European Union.
With the exit of one of the e-commerce top players from the European market, it comes as no surprise that trade procedures and the related tax obligations as we know them will cease to exist.
Starting on 1st January 2021, sellers who wish to start or keep on trading in the UK will see several changes coming into place.
Customs borders and new VAT rules are two examples of what will be impacted by Brexit. However, at the time of publication, UK-EU negotiations are still ongoing, and a possible deal between the two forces might mean the UK will benefit from a preferential status in relation to the EU, with fewer trade requirements than other non-EU countries.
In the following article, our partners AVASK Accounting & Business Consultants explore the main Brexit changes that will affect seller trading or planning to trade in the UK and their tax obligations. We also provide guidance on the necessary steps to take in order to ensure full compliance with the new tax obligations and successful trade in the UK.
A third country
Post-Brexit, the United Kingdom will be termed a third-country and Northern Ireland will have dual-status. This means that Northern Ireland will maintain its EU membership and therefore be part of the EU Single Market for VAT purposes, while also forming part of the UK customs territory.
But what is a “third country”?
The expression “third country” essentially refers to any country outside the EU and outside its economic structures, being the European Single Market and the customs union.
Businesses in a third country have to fill in customs declarations when they import from and export to the EU. This will be one of the main Brexit changes, coming into place regardless of whether a trade agreement is in place.
The end of the Brexit transition period on 31st December 2020 is imminent, and HM Revenue and Customs’ new approach to the VAT treatment of goods arriving in Great Britain from outside the UK and vice versa will soon be upon us.
For all Amazon and e-commerce sellers, preparation is key to avoid stock losses resulting from stock being blocked at customs, frustrated customers due to unforeseen shipment delays, and potential fines from UK or EU tax authorities.
The new role of online marketplaces
The new UK e-commerce reforms also see some changes coming into place for online marketplaces (OMPs), such as Amazon and eBay.
Under the new regime, OMPs will become responsible for charging, collecting, and accounting for UK VAT on certain transactions. This is a truly innovative change for Europe, resembling the role played by Amazon in the United States of America.
In other words, the OMP will become the deemed supplier. This means that a seller operating through a selling platform will not be seen as directly transacting with the final customer, but as an intermediary. The OMP will be seen as making a supply to the UK consumer, thus becoming accountable for the UK VAT on that sale.
Our prediction is that the OMPs involved in these changes will wish to enforce stringent measures on their online vendors. In fact, online marketplaces will be held accountable to VAT purposes, and they will want to avoid penalties and additional fees.
However, sellers should know that OMPs will play this new role only in specific situations.
Online entrepreneurs will still need to charge, collect, and account for VAT in determining conditions.
The main criteria to determine whether VAT will be collected by the OMP or the sellers themselves will be:
- The location of the goods at the point of sale – are you storing your products outside or inside the UK?
- The value of the consignment – is the value of your consignment above or below £135?
Whether an OMP is facilitating the sale or not – are you selling via Amazon or via your personal website?
Whether it is a B2C or B2B transaction – is your client an individual or a business?
Let us explore the way these criteria will come together to determine the way selling in the UK will change for several online retailers.
If your goods are located outside the UK at the point of sale
An overseas seller storing goods outside of the United Kingdom, for example in the US or Germany, and selling a product worth less than £135 to a GB customer, might find themselves in one or both of the following scenarios.
If the merchant is using an online platform to supply the imported goods to UK customers, the VAT liability will fall on the platform itself.
Instead, if the seller supplies their goods directly to the consumer without using an online marketplace, but, for example, via their own website, it will be their duty to charge, collect, and remit UK VAT to HRMC.
In both cases, VAT will be accounted for at the point of sale, that is to say when the transaction is completed, and not at importation or delivery.
Merchants following a multi-channel strategy and selling via several selling platforms might fall into both scenarios.
If your goods are located inside the UK at the point of sale
Overseas sellers storing goods in the United Kingdom at the time of sale to a UK customer find themselves in a different position from the one explained above.
In fact, they will already have paid the duty obligations requested at importation. As the products are stored in the UK, it will be necessary to register for UK VAT and UK EORI, which allows you to clear imported goods at customs.
Depending on whether the sale is facilitated by an OMP or concluded via a personal website, the seller may or may not be accountable for collecting and remitting UK VAT to HMRC.
What about B2B?
As we mentioned before, one of the criteria to determine whether merchants trading in the UK will be affected by the new tax requirements is the nature of their trade.
Business-To-Business (B2B) transactions will not fall under the new changes. If the customer is a UK VAT registered business, they may provide the merchant or the OMP with their UK VAT number as evidence for zero-rating.
In fact, sellers should not forget that B2B transactions are usually zero-rated where both parties can provide a valid VAT number.
In this case, the UK business customer will use the reverse charge mechanism and report the VAT due.
UK VAT: should I register?
With online marketplaces becoming an active part in the sale process, many overseas sellers might be asking themselves: should I register for a UK VAT number?
The answer is yes.
When importing your goods in the UK, you will be asked to pay several duties, including import VAT and customs duties. While duties cannot be reclaimed, sellers with a UK VAT number can reclaim import VAT in their UK VAT return.
In case you have already decided to store your goods on British ground, you will then need to be in possession of a UK VAT to do so in a compliant way.
The way forward for merchants
Brexit will trigger several changes that will affect VAT and tax obligations for e-commerce sellers.
VAT as we know it, including its processes of collection and remittal to the tax authorities, will transform significantly. Sellers will need to keep track of how their online sales reach UK-based customers.
Now is the right time to take proactive measures as you plan and prepare for a probable no-deal Brexit situation.
At AVASK Accounting & Business Consultants, we recommend doing the following:
- Register for VAT where required
- Apply for a UK and EU EORI number to clear your goods at customs
- Analyse your current supply chain and identify the weaknesses
- If EU consumers are your main customer base, consider relocating your inventory to an overseas warehouse in order to avoid additional shipping costs and duties
- Adjust your tax settings if you are using a platform to advertise your goods
- Review your shipping options for shipments between the UK and EU as you will have two options:
- Delivered at Place (DAP): the vendor is responsible for shipping the product, while the consumer has to absorb any import cost
- Delivered Duty Paid (DDP): the vendor is responsible for all import costs
- Lastly, clarify your refund policy. If DDP is offered, will any previously paid import taxes and customs duties be refunded?
AVASK Accounting & Business Consultants is a global firm of accountants and Tax Advisors that specialise in international taxation and expansion solutions for e-commerce sellers, including accounting and business advisory services.
We work with the most outstanding and proactive professionals to deliver excellent value for more than 10,000 e-commerce sellers and companies across the world. We are known for our drive and ambition, and focus solely on building success through cross-border activities by delivering clear and simple advice and devising new strategies that will ensure growth and development.
Sellers can reach out to us at email@example.com, or visit our website (www.avaskgroup.com). We have also created a Brexit Hub for all e-commerce sellers, which contains a variety of resources to get ready for Brexit (https://www.avaskgroup.com/brexit-e-commerce-hub/).