Major EU VAT reforms introduced on 1 July 2021 aim to make the tax system much more efficient by shaking up rules on e-commerce VAT for sellers and marketplaces.
Some of these new obligations could pose challenges in e-commerce for small UK businesses selling into the European Union (EU).
But while you might be worried about having to tackle more legislation, they actually bring several benefits that could save time and make life easier for your business in the long run.
What are the EU’s VAT reforms?
The new rules, known as the EU VAT E-commerce Package, aim to ease compliance and administration for e-commerce businesses selling to consumers across the EU’s national borders, thus facilitating trade.
They create a uniform VAT regime for cross-border supply of goods and services and a simpler system for declaring, paying and collecting sales tax.
The EU claims the new system will be faster and more efficient, and save businesses up to £1.9bn a year in compliance costs.
Any e-commerce company that used the Mini One-Stop Shop (MOSS) for digital services will understand the benefits of simplification.
The new laws extend MOSS by opening it to more goods and services, including those imported into the EU, to simplify VAT for many more types of sales.
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The key changes in the new rules are:
- Introduction of One-Stop Shop (OSS) and Import One-Stop Shop (IOSS) VAT returns, to reduce the number of VAT returns companies selling across borders have to file.
- Online marketplaces recognised as deemed suppliers and given responsibility for VAT collection.
- Removal of distance selling thresholds below which companies didn’t need to register for VAT. This means everyone must either register for the IOSS or charge VAT on goods traded into the EU.
- Abolishment of low-value consignment relief (LVCR) for imports entering the EU.
The new rules are complex. They’re a challenge for small UK business owners to understand and adopt while running daily operations.
The abolition of LVCR is a challenge for the small companies who previously benefited from it, as it means registration and compliance costs will kick in at a lower level.
Another difficulty is that companies in the UK currently can’t register for IOSS without a European intermediary. Due to the way the UK agreed its “mutual VAT assistance” with the EU, UK accountants are not currently allowed to do it. But this is under negotiation so hopefully will change soon.
However, despite the challenges, the rules will help many small businesses in the long run, especially as they grow.
How the EU VAT E-commerce Package will help your business
There are four main benefits for UK e-commerce businesses.
First, if you are or are likely to become VAT registered in multiple EU countries, you should be able to reduce this administrative burden by submitting VAT in only one country via the OSS or IOSS.
Next, using only one VAT return for the whole of Europe should also reduce your compliance costs associated with multiple registrations. These two benefits should make you much more efficient.
Thirdly, the IOSS is not mandatory. But for those who use it, the customer will have a seamless experience without any cross-border duty or VAT.
Finally, online marketplaces have become deemed suppliers and therefore responsible for the VAT. This makes life much simpler for those selling on those marketplaces.
We cover these in more detail below.
Benefits of the One-Stop Shop
The IOSS simplifies the collection, declaration and payment of VAT for sellers supplying goods directly from outside the EU to consumers in the EU. The OSS does the same for UK sellers if they store goods in an EU country and distribute to other EU countries from there.
Because OSS and IOSS are not mandatory, companies can follow the existing regulations, which involve registering for and paying VAT in each EU country in which they sell to consumers. For many companies, this is onerous and inefficient — one main reason OSS and IOSS were created.
But now, sellers can register for a One-Stop Shop in one country of your choice.
Your OSS return indicates the net value of supplies to each EU country with applicable VAT charged and collected. Once you’ve filed your OSS return and paid the relevant amount, the receiving tax authority will pass on the VAT owed to the authorities in each country.
Ben Sztejka, chartered accountant at Your Ecommerce Accountant, says: “For very small businesses who didn’t breach the distance selling thresholds, the new system increases compliance.
“But for medium and larger companies that have already breached distance selling thresholds, and sell larger volumes across Europe, the OSS system means they no longer have to do lots of VAT returns, just one.
“So, for example, if a UK SME breached five distance selling thresholds in the EU, they previously had to register for VAT in five different countries.
“With the OSS, they only need to register in one of those countries and do one OSS VAT covering the rest of Europe.”
IOSS rules and sales consignments
The IOSS return only applies where imports are made into the EU with a sale consignment value under €150.
Sale consignments are batches of goods sent to customers in the EU, via a third party, from stock held outside it. This is different from shipments of stock into the EU to be stored in a fulfilment warehouse, for example. For these, there are no changes.
Under the new rules for sale consignments, you file your IOSS return in one country of your choice and declare sales consignments under €150 arriving throughout Europe.
The IOSS return then follows the same format and process as the OSS system.
Seamless selling with IOSS
Sztejka says there’s another incentive to join IOSS for small providers – one that will result in providing a good customer experience.
While the scheme isn’t mandatory, if you haven’t registered for IOSS, VAT will be levied on your customer when your goods hit the European border.
“The authorities will stop the goods and send a letter to the customer saying they need to pay the VAT or it will be returned,” he says. “So, the customer will have a bad customer experience and likely leave you a bad review.
“If you register for IOSS, your goods will not be stopped and your customer will not get this letter. They receive their goods seamlessly, and have a lovely experience.
“The consumer still pays the VAT, but it’s already paid upfront in the initial price, which is much easier for them.”
As mentioned above, this only applies to consignments worth less than €150. Anything over that still incurs VAT at the border. So this rule is a major help for small e-commerce providers.”
Online marketplaces take responsibility for VAT
OSS and IOSS are for sales that don’t use an online marketplace.
Where a marketplace facilitates the sale, it’s responsible for collecting VAT and declaring this on its OSS return.
Melanie Shabangu, partner at e-commerce accountant AVASK Group, gives an example of a UK vendor that sells on Amazon.de but stores all stock in a UK warehouse.
An order under €150 comes in on Amazon.de from a customer in Germany. The order is fulfilled from the UK and sold to Amazon at this point.
Shabangu explains: “You make the sale to Amazon that is zero-rated for VAT. Amazon then sells it to the end customer and declares the VAT on their OSS return appropriately.
“Amazon becomes responsible for the VAT collection and reporting, negating the seller’s reporting obligations.
“You don’t need to register for OSS either, and if you make all your EU sales through a marketplace, you don’t need to register for OSS at all.”
All in all, a great advantage for smaller firms.
Sztejka says: “This does simplify things as the fiddling around with compliance disappears and you can then do more cross-border sales to other places in the EU, all with VAT handled by Amazon.
“You no longer need to worry about multiple registrations.
“If you’re not using an online marketplace and you store your goods in Germany and distribute from there, you will still need a German VAT registration, and use OSS to record cross border sales.
“So, although the rules do simplify things, you still need to work through a decision tree to see which is the best option for you, and it can still get complex.”
Make sure you understand the rules
The new EU rules on VAT for e-commerce businesses will certainly create some challenges. As it’s such complex area, it makes sense to get advice from an e-commerce VAT expert or an accountant.
But there are plenty of reasons to be cheerful.
As time goes by, early wrinkles in the scheme for UK businesses should get ironed out. Business owners will get used to the new regime. And you should find the rules make life easier, especially as your EU sales volumes grow.
As you adjust to the new legislation, the key takeaways are: get advice, make sure you understand the new rules, and analyse your sales so you can see clearly how the rules affect you.