After being postponed once due to the global pandemic, the new EU VAT rules for ecommerce are coming in July.
Not only will these affect the VAT treatment of goods already in free circulation in the EU, but the new set of VAT measures will also impact how VAT should be charged on goods imported from third countries. This includes the UK, when sold to EU customers.
In this article, we have summarised the key changes that ecommerce businesses should be aware of when selling imported goods to EU consumers from July.
Charging VAT on all commercial goods
Starting 01 July 2021, the VAT exemption on the importation of low-value goods (up to EUR22) will be abolished across the European Union. This means that businesses will need to charge VAT on all commercial goods imported in the EU from that point.
For example, if a business has been selling low value items to EU customers, where the good are imported after being manufactured in Asia, VAT would not be due on these low value items historically.
Under the new ecommerce rules for imported goods, the applicable VAT rates will need to be charged on all imported items, including low value ones, when sold to EU-based customers.
This new obligation will result in increased VAT collection for tax administrations as well as additional VAT reporting for sellers. However, to ease the VAT compliance burden, the EU is introducing a set of simplifications for small ecommerce businesses.
Importing goods through the Import One-Stop-Shop
A new electronic scheme is currently being developed by EU tax administrations. This will be made available to ecommerce businesses to report and pay the VAT due on the goods they import in consignments of a value up to EUR 150.
Under the so-called Import One-Stop-Shop (IOSS), VAT will need to be charged based on where customers are located, and at the point of accepting the payment from the customer. Once the VAT amounts have been collected, the IOSS user will need to make a single electronic VAT return and payment to the EU country where they are registered for IOSS.
Joining this scheme is optional and as a non-EU seller, you would need to appoint an EU-based intermediary to benefit from the scheme. This may present additional costs that you would need to consider for your business.
When are marketplaces liable for the VAT on imported goods?
When goods are supplied to EU consumers through a marketplace such as Amazon, Ebay or CDiscount, the responsibility to charge and collect the VAT from customers will shift from the seller to the marketplace for specific transactions. This is good news for sellers who, in certain scenarios, could potentially no longer require a local VAT registration. However, it does require the understanding of exactly in which circumstances the VAT liability will fall on the marketplace.
Under the new ecommerce rules, online marketplaces will be considered, for VAT purposes, as the supplier of the goods when they facilitate the following supplies:
- Distance sales to EU customers of goods when the products are imported in a parcel with a value not exceeding EUR 150.
- Supplies of goods to EU customers, irrespective of their value, when the online seller is not established in the EU.
For example, a UK business, selling exclusively low-value items through a marketplace to EU consumers without holding stock in the EU, would no longer need a VAT registration under the new ecommerce rules as the marketplace would become the ‘deemed supplier’ of the goods, taking on the VAT collection liability.
However, a UK PAN-EU seller would still need a local VAT registration in each country where they are holding stock in the EU, even as they would no longer collect the VAT from customers. In this case, the UK seller would be deemed to be supplying the goods to the marketplace, who would, in turn, be supplying the goods to consumers.
Special arrangements for postal operators
What if a seller chooses not to register for IOSS? The alternative would be to either stick to the standard customs procedures to import the goods to consumers, or postal operators can instead use so-called special arrangements to report the VAT due on those sales. Under these arrangements, VAT will be collected from customers on importation. This is likely to result in an unpleasant surprise for the end customers and additional fees to the seller from postal operators who will have to deal with the VAT compliance obligations.
Importing goods in packages with a value exceeding EUR 150
Online businesses selling goods which are shipped in a consignment package which value exceeds EUR 150 will need to follow the current importation rules as higher value items are not affected by the changes.
Why is the way VAT should be charged on importing goods changing in the EU?
With shopping habits increasingly moving online and the rise of large online marketplaces, EU brick-and-mortar businesses have been facing unfair competition from overseas online sellers who have been able to benefit from the inadequate VAT rules to sell goods to EU consumers without always charging VAT.
The new EU VAT rules for ecommerce are designed to abolish the legislative loopholes and ensure VAT is always being charged to EU consumers regardless of where the seller is established.
That said, as we know too well, VAT collection can be burdensome which is why the new VAT rules for ecommerce also include the above-mentioned simplifications for suppliers to remain VAT compliant.
How to prepare for these changes?
The key is knowing where your customers are going to be located so you know what VAT rates apply to your products in the country of consumption of your goods.
Ecommerce businesses should review their supply chain to understand how these changes affect them, where additional costs may incur and if their customers may experience poor purchasing experience as a result.
If you are unsure about what VAT rates apply to your products or if you are eligible to use the simplifications, speak to an expert who will be able to help you navigate these changes.