VAT Changes: What Brexit Means For eCommerce

Britain and the European Union reached a landmark deal on Brexit on December 24th. This hard-fought trade agreement has been stretched around 4 years, but finally, the post-Brexit future is known. The deal, which was ratified in Brussels, took effect on January 1st. For Britain’s Prime Minister Boris Johnson this deal means fulfillment of his promise to “get Brexit done”. His speech was very encouraging, but, do the UK eCommerce businesses share the same optimistic views as their Prime Minister? 

What Brexit means for the eCommerce future and how it will affect the Value Added Tax (VAT)?

As a price monitoring tool that operates worldwide, we’re already witnessing changes.

Where Do We Stand With Brexit?

The UK officially left the European Union on January 31st, 2020, so the year behind us has passed as a transition period. Until the end of it, businesses had to make hardly any changes, mostly because the final trade agreement saw the light at the end of December. But, January 1st, 2021 brought new rules. As of January 1st, UK businesses have to implement changes in their trade policies. This means that the same import and export policies that applied to non-EU countries will from now on apply to EU countries as well. 

In practice, this will bring more complex custom procedures and changes in how the VAT is calculated. During the transition period, the UK has remained a part of the EU customs and VAT meaning that there were no trade borders between the UK and other countries. 

However, the changes will also affect the eCommerce sector. The UK HM Revenue and Customs agency has released a paper on the VAT change with all the necessary details for eCommerce subjects. 

 4 VAT Changes That Will Impact eCommerce Market

In 2019, a global eCommerce insights firm Edge by Ascential published a report where the UK was presented as the world’s third-largest eCommerce market and the first eCommerce market in Europe. But, with Brexit things might change.

Even though the trade agreement might change in the future, one thing is certain – the trade with the UK will be more complex. Experts predict that supply chains will struggle during the adjustment period, and the customers will think twice before ordering if additional costs apply after the checkout. 

For now, all the changes can be summarized into 4 main points:

1. The End of Low-Value Consignment Relief: Until now, goods valued at £15 or less were not under VAT tax. But, with new regulations, the tax relief will not any longer be applicable. From now on, any goods under £135 will be subject to the VAT tax.

2. VAT Will Be Collected at the Checkout: Before the new agreement, VAT taxes were collected at customs, during importations. With the new regulations, VAT will be collected at the checkout. Sellers or marketplaces will from now on be in charge of providing customers with the invoice that has the UK VAT showing. For instance, if you are a seller from the US or any other EU country, you will need to provide the VAT tax on the invoice for your UK customers. 

3. Marketplaces Will Have To Take More Responsibility: Online marketplaces will have more work on their shoulders. They’ll be responsible for charging, collecting, and accounting for VAT. In practice, this means that if you are selling items to UK customers over Amazon, for example, Amazon will be in charge of collecting the VAT.

4. Merchants Will Need to Register for VAT in the UK: This is a very important point! If you are not selling goods over marketplaces, but directly to the customers, you’ll have to get a VAT registration with the UK HMRC. For instance, if you are a merchant who has a store on Shopify or any other eCommerce platform for that matter, you will need to register for a VAT in the UK.

How Is Price2Spy Responding To VAT Changes?

As you can see, pricing and classifying goods on an eCommerce site will become a lot more challenging. Therefore, help from the right price monitoring tool such as Price2Spy will be much needed. 

Some of our clients from the UK have already informed us about the changes. According to them European shops that sell into the UK have switched to displaying prices without VAT which shows them as 20% lower than they should normally be. Their request was to treat the UK stores and prices on their sites as “ex VAT”. This change has already started affecting the market position of UK sellers.  The good news is that Price2Spy is a very flexible service and that clients can instruct us if they want to keep the prices as shown on the product page, or we can add VAT.

Unfortunately, the biggest losers in this situation will be small retailers who were selling their goods to the customers directly. By doing so, they could be more competitive on the market, but with new administration and taxes, this will no longer be the case. 

How Can You Prepare For New VAT Regulations?

The smartest thing would probably be to speak to your accountant or a local tax professional. Also, you can prepare by doing your research – there are lots of official websites and papers that cover all the important information.

From what we know so far, for goods shipped from the UK to the EU countries between January 1st, 2021 and June 30th, 2021, the following rules will apply:

• Until now, when selling goods to another country, EU member merchants were required to register for a VAT number if their sales exceed a certain threshold. As of 2021, UK sellers will need to VAT register in each country they’re selling to. Experts advise choosing those countries wisely – Germany, for example, does not have a very good postponed VAT accounting.

• As we already explained, sellers from EU and non-EU countries will have to register for a VAT with HM Revenue and Customs if the value is below￡135.

How Should You Address The Customers?

It’s very important to communicate all the changes with your customers. First of all, you will need to update your customer terms and shipping policy. Understandably, this will require price changes as well, so you might want to revise your pricing strategy. 

To put things simply, you’ll have two options. Either you decide to have customers pay this extra money, or you can try to calculate a new fair product’s price. Of course, the first option is easier, but customers won’t be so much satisfied with that option. 

The competition will have to make adjustments as well. Revising your pricing strategy will be needed. Now more than ever you’ll have to pay attention to capturing more product details such as the shipping costs, time and details, stock status, etc.

Conclusion 

One of the hot topics in eCommerce these days is Brexit and VAT changes that it will cause. As always, we wanted to put things into perspective for you, regardless if you’re a brand/retailer or a customer. Since this is a complex and fairly new topic, we’re providing you a few links where you can find additional information:

• GOV.UK’s Brexit Transition
• Avalara: Brexit UK VAT for EU & US eCommerce sellers
• Avalara: Brexit EU VAT and customs options for UK eCommerce sellers
• GOV.UK What will the end of the transitional period mean for the retailers

We hope you’ll find it useful! 

What are your thoughts on Brexit VAT changes? To which extent it will affect your business?

You’re welcomed to share your impressions in the comments below!