EU VAT obligations for eCommerce sellers explained – and what you need to do

EU VAT obligations for eCommerce sellers explained – and what you need to do

If you are selling online – either via your own website or an online marketplace such as Amazon – there are new requirements coming

International Trade Specialist, Frances Fawcett works with numerous eCommerce sellers and here she explains the changes to prepare for.

What is changing?

It is relatively easy to set up an online store and sell your products. The global reach of the internet means that many traders are quickly exporting to customers in the EU and beyond. Add some targeted communications to overseas markets, and you can build a successful international online business. This is great for traders and exporting is a sound growth strategy for many. You manage your VAT obligations appropriately in the UK – or your accountant does! You must also manage your VAT obligations on overseas trade.

Exports are zero rated for VAT so there is generally no need to charge VAT on your export sales. However, when the goods arrive at the border in your overseas market, import VAT becomes due. Today, if your shipment is below €22 to EU customers, there is no VAT liability. But governments (including our own in the UK) have realised that vast quantities of goods are now sold online and shipped around the world and may be escaping the import VAT that they attract, including packages valued over the €22 threshold.

The role of customs is to control the flow of goods into and out of our countries, but it is also to collect taxes. Those are the taxes that are used to run our countries so although none of us like paying them, we all need them to be paid.

In response to this “gap” in satisfactory collection of taxes, the EU is putting in place the new Import One Stop Shop (IOSS).

What is the Import One Stop Shop?

According to their website on 27th May:

The Import One-Stop Shop (IOSS) is the electronic portal businesses can use from 1 July 2021 to comply with their VAT e-commerce obligations on distance sales of imported goods.

According to the VAT rules applicable up until 1 July 2021, no import VAT has to be paid for commercial goods of a value up to EUR 22.

The new VAT e-commerce rules will abolish this provision as of 1 July 2021. Thus, from 1 July 2021, all commercial goods imported into the EU from a third country or third territory will be subject to VAT irrespective of their value.

So, in other words, once the €22 threshold has gone, eCommerce sellers must comply with VAT obligations and the IOSS could be the solution.

Do we HAVE to use the IOSS?

No – you have two choices. Import VAT will have to be paid but you don’t have to pay it. I have met a small number of eCommerce sellers who are happy that their customers will pay. I admit it is unusual and most want to prevent their customers from ever being aware of extra costs, but some are happy to inform their customers and let them take care of what is needed.

The Incoterms® rule tells customs who is taking care of import procedures and fees. If you ship your goods under DAP (Delivered At Place) you can pay for shipment right to your customer’s door, but the import fees will be the responsibility of your customer. What this looks like in practice is that the goods are shipped to the customer, and then held at the border. The customer is contacted for payment of the VAT and any other fees that are due, and this typically takes place by the customer providing debit/credit card details for the payment. The goods are then released from customs and delivered to the customer.

Incoterms® DAP: You can pay for shipment right to your customer’s door, but the import fees will be the responsibility of your customer

None of this involves the IOSS and it works fairly well – but only for those that are happy to have customers contacted for additional payments.

But I don’t want my customer contacted for an additional payment!

If, like most eCommerce sellers that I work with, you don’t want your customer to be troubled with the inconvenience, additional cost, and delay of that approach, you will need to use the IOSS for your EU sales when it is available.

The IOSS enables eCommerce sellers to meet the VAT obligations that are due thus alleviating their customers of that task. In a nutshell, I have explained the primary steps below.

How the Import One Stop Shop (IOSS) works:

  1. Sellers register for the IOSS. Registrations opened in EU countries on 1st April.

    You can register in any country.

  2. Sellers apply VAT on sales to customers in the EU. The rate of VAT is the rate applicable in the customer’s EU country.

    This sounds complex so I will offer some ideas on this later.

  3. Sellers provides their IOSS VAT identification number with the goods at the EU border.

  4. Sellers submit monthly VAT returns to the IOSS portal and pay the VAT.

Charging the rate of VAT in the EU country – that sounds extremely complicated!

Yes, it does and it could be. Each EU country is free to have its own rate of VAT and, at time of writing, they vary from 17% in Luxembourg to 27% in Hungary. If your online store can take care of that (and it should be able to), then you can automate the VAT rate that is applied. However, one eCommerce seller that I work with takes a slightly different view. He has analysed his EU sales and worked out that the VAT element averages 21% so he charges 21% on all his EU sales. Provided that he pays the correct amount on his VAT return, and his customers don’t object if the rate charged is slightly higher than their country’s standard rate, he is meeting his obligations.

My view is that that having this automated to the exact rate in your customer’s country on your webstore is the right approach, but that example shows there are other ideas.

Any catch?

Unfortunately, there is a catch to the IOSS that could be a very big issue for some eCommerce sellers in the UK. As the website says:

If businesses are not based in the EU, they will normally need to appoint an EU-established intermediary to fulfil their VAT obligations under IOSS.

If you are a UK business without any EU presence, you will need an EU-established intermediary. This is relatively straightforward to do, and we often direct our clients to a separate company – Trade With Europe – who provide an excellent service to help with this, and numerous other aspects of trading with the EU.

But, of course, this comes at a cost. I am working now with businesses to analyse the value of their current (perhaps pre-Brexit) and future EU business. This enables them to evaluate the cost of services such as EU intermediaries against the revenue they receive so they can see a return on those costs.

The EU is a huge market opportunity for UK businesses. In GDP terms, it is five times the size of the UK and on our doorstep. As a company our work is to help businesses build their exports and the EU is often the first market they target. It is therefore heart-breaking to see a business conclude that eCommerce sales to the EU are not viable. I am sad to say I have seen businesses come to this conclusion. But please let us help you with the analysis – a market five times bigger than the UK offers great potential.

What else do I need to know?

  • Online Marketplaces, e.g. Amazon
    • Sales through online marketplaces such as Amazon are not covered by your IOSS registration. Instead, the online marketplace is required to collect the VAT and have their own IOSS registration.
    • Each online marketplace will naturally have their own processes for this so if you are selling through an online marketplace, ask them what processes they will use. We are expecting that they will take care of what is needed on your behalf so although they may charge you for the service, this could reduce your VAT administration. Note that the EU refers to these platforms as “Electronic Interfaces”.
    • TAKE ACTION: If you are selling via a website other than your own, ask them if they will be considered an online marketplace or electronic interface when the IOSS arrives. Amazon is and contacted their sellers in May. Others have not made things quite so clear at the time of writing.
  • Keep your records for 10 years
    • In the UK we are accustomed to keeping our business records for 7 years.
    • Note that the IOSS requires that you keep your records of all IOSS sales for 10 years.
  • This only applies to shipments valued at up to €150
    • For many of the eCommerce sellers that I work with, this will cover all their online sales.
    • However, if you do have shipments valued at over €150, you can’t use the IOSS. In that case, normal exporting rules apply. Goods are sold at a zero rate of VAT because they are exports, and then import VAT becomes due when they enter their destination country. As mentioned above, the Incoterm® rule determines who is responsible for the import procedures and fees and anything other than DDP (Delivered Duty Paid) means it’s the customer. If you want to take care of this for your customer, you will need a shipper who can send your goods DDP and then you will be able to pay the import fees on the shipment.

In conclusion

The IOSS is a good thing! Whether we (or our customers) like it or not, taxes have to be paid. The provision of a centralised process for this across the 27 member states of the EU helps eCommerce sellers meet their obligations efficiently. Unfortunately, there are requirements that add to the cost but they do enable us to meet our obligations with one process and not 27. That has to be a good thing!

Can we help you? Of course. We can provide guidance bespoke to your business to help you navigate this and other realities of Brexit and we can tell you about grant funding that is available. This could mean that there is no cost to your business to obtain our training and support. We look forward to helping you!

More info? Contact the team today!

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