On 1st July, the EU’s long-anticipated VAT reform package came into effect, designed to reduce online VAT fraud and bring more efficiency to the way companies register to pay tax. In light of the UK’s third country status post-Brexit, the new regulations have a significant impact on the way British businesses trade with the bloc:
- The EU Ecommerce package makes marketplaces liable for certain types of transactions on their platform for the first time.
- The EU has removed VAT exemptions for SMEs and shipments not exceeding €22, which includes the sale of low-cost items like books.
- Online retailers and marketplaces in the UK are now responsible for the collection and remittance of VAT.
- The EU has also introduced a “One Stop Shop” (OSS) system, intended to be a tax simplification. It means businesses can report and pay VAT for all B2C sales that are subject to destination VAT to all EU countries in one fell swoop with a single registration.
- For third countries (including the UK, China, and the US) the EU has introduced the Import One Stop Shop (IOSS) – a similar single portal system through which sellers can decide to report and pay VAT on the online sales of B2C goods from a third country with the EU.
Compliance presents upfront challenges, despite long-term gains
As a result of the changes, tax technology firm Avalara estimates that 26,000 ecommerce sellers (just over 10 per cent of the UK sector) will now need to register for VAT for the first time under the “Import One Stop Shop” (IOSS) system.
The new rules affect the trading arrangements of thousands of retailers as well as contracts with suppliers not yet aware of the consequences. The risks for failure to comply include fines, double duties and the possibility of shipments blocked on arrival, impacting customer service due to delayed goods.
Though IOSS will ultimately lead to a long-term simplification of the tax process, there is a significant amount of upfront admin involved to prepare for the changes – from understanding the classification of products sold, to labelling VAT charges on products at the point of sale and overhauling reporting systems.
Estimates from Avalara show that, for the average business, that means taking a hit of £8,000 to upgrade systems and processes ahead of implementing IOSS – a tough bill to swallow in the current volatile economic climate.