eCommerce merchants, sellers, retailers and anyone doing business in the United Kingdom has long known that changes are on the horizon ever since the country voted for Brexit in 2016. The negotiations and exact terms of the exit have created a lot of uncertainty which has made it difficult for businesses of all sizes to plan.
Well, we finally have some concrete insight into the changes to the Value Added Tax (VAT) structure that will be implemented on January 1st, 2021. The UK HM Revenue and Customs agency has released a thorough policy paper on the changes to VAT treatment of overseas goods sold to customers that provides details on what merchants and online marketplaces need to understand. We encourage you to read it in full but we know you’re also busy, so in this article we’re going to break down the main changes and how you can best prepare.
The top priority for merchants is to understand the new rules and regulations and what they have to do to be compliant moving forward. We know taxes and duties are often complex to understand, but you absolutely need to understand how they work for international shipping.
Next, you need to provide as much clarity and transparency to your customers as possible as there’s certain to be confusion on the part of buyers who already might have hesitation about making a cross-border purchase. This reinforces our core belief that merchants need to provide their customers with landed costs at checkout to provide the best customer experience to convert more sales.
There’s no question that these changes will add a new layer of bureaucracy and more tax liabilities for merchants. There could be future changes as well as the UK and EU continue to negotiate a free trade agreement.
In this article, we’ll briefly cover the background information on Brexit, the VAT changes that will happen in January, and how Easyship can help provide cost transparency for cross-border sales.
Quick Brexit Background
In a country-wide referendum in June 2016, the United Kingdom voted to leave the European Union, ending their 47 year membership. After several years of negotiations, deadlocks and political turmoil inside the UK, the Article 50 process by which the country withdraws from the EU was formally ratified by the UK Parliament with an official withdrawal date of January 31st, 2020. During the 2020 transition period, negotiations have been ongoing between the UK and EU over trade and other regulations around the separation. The long term impacts are uncertain but the withdrawal is certain to change how businesses conduct international business with the UK.
4 Changes to Value-added Tax (VAT) That Will Impact eCommerce Merchants
There is no way around it. Trade with the UK is going to be more complex and complicated with much uncertainty. For merchants conducting cross-border sales, it’s critical they are proactive with their planning, review supply chains, and understand any registration liabilities. You will also need to consult your accountant or a local tax professional to make sure you are fully compliant.
- The End of Low Value Consignment Relief: Currently goods valued at £15 or less are not subject to VAT, but that will change with the new rules. For example, if you were a merchant selling small items like mugs or small toys, you previously were not subject to the VAT tax. With the new regulations that relief will be eliminated, and any consignment of goods under £135 will be subject to the VAT at point of sale.
- VAT Will Be Collected at Point of Sale: Currently the VAT tax is collected during importation at customs but that will change on January 1st, 2021. Moving forward, the VAT will now be collected at the point of sale (checkout) for goods under £135 in value. The seller or online marketplace (OMP) will be responsible for providing customers with a customs invoice that has the UK VAT showing. For example, this means if you are a seller in the United States, you will need to collect and account for the VAT tax when you make the sale to a customer in the UK, and you will need to provide that on the invoice and documentation.
- Online marketplaces (OMPs) Will be Responsible for Collecting VAT: OMPs will now be responsible for charging, collecting and accounting for the VAT on the sales of goods by overseas merchants and sellers. There will be no de minimis provision. For example, if you are selling goods on the Amazon Marketplace to a customer in the UK, Amazon will be responsible for collecting the VAT from the customer. They will be deemed the supplier of the goods in these instances. You will want to consult your accountant or tax specialist because you will still be required to make a zero-rated supply of the goods to the OMP on your VAT return.
- Merchants Will Need to Register for VAT in the UK: If you are a merchant selling directly to customers without an OMP, then you will need a VAT registration with the UK HMRC. This is important! This is required for goods that are outside the UK at the point of sale and do not exceed £135 in value. For example, if you are a merchant selling with a store on Shopify or Squarespace, then you will need to register for a VAT in the UK, and collect the %20 VAT tax at checkout.
What Steps Should Sellers Take Now to Prepare?
First, take a deep breath and understand that this is very complex, and there remains a lot of uncertainty on how this will all work out. It’s expected that there will be issues along the way.
- Prepare as much as you can right now by reviewing these new regulations and developing an action plan for implementing business changes for 2021.
- Speak to your accountant or tax consultant
- Register for UK VAT. Avalara is a firm that helps businesses navigate VAT regulations, and they can help with registration.
Update Your Shipping Policy
If you don’t have a shipping policy in place, it’s important you create one. You can use our shipping policy generator to help you create one in just minutes. Your shipping policy should outline the costs and how they will be handled for your customers. This includes who will be responsible for paying the tax and duties.
Understand Deliver Duty Paid (DDP)
It’s time you familiarize yourself with Deliver Duty Paid (DDP) and Deliver Duty Unpaid. Essentially, the difference comes down to when the duty and tax is paid. With these current Brexit changes, it’s going to be smart for merchants to go with DDP. This means that the tax will be paid at the point of sale by the customer and the shipment will include a DDP shipping label.
This is really important!
In order to clear UK customs, you need to have a DDP shipping label. Now, there’s some uncertainty about where exactly DDP information will need to be displayed. When you use Easyship for label generation, you can rest assured knowing DDP will be displayed on the commercial invoice included with every shipment, complying with UK customs regulations. In fact, we provide all necessary shipping documents for cross-border shipping, assuring your goods clear customs without any issues.
Here's an example of the shipping label, commercial invoice and packing slip
Merchants Should Consider Moving Inventory to Warehouses in the EU
If you are a growing merchant, now is a good time to consider a global fulfillment partner. Easyship works with a global warehouse partner network covering four continents, and can help you transition to e-fulfillment.
This is particularly useful for UK merchants looking to move inventory into warehouses in the EU to streamline their fulfillment and provide a better delivery experience for your customers. Easyship can help. Our fulfillment experts understand the complexity of Brexit and how growing eCommerce merchants can leverage a global warehouse network to save money on fulfillment and logistics. If you have any questions, get in touch and one of our experts will guide you through the process.
Don’t Wait, Be Prepared
Brexit is here and it’s going to be disruptive for merchants selling into and out of the UK. There’s just no getting around the complexity. We understand these are anxious times for merchants looking to go global and expand their business. But there’s really never been a better time to take advantage of cross-border shipping.
At Easyship, we streamline the shipping process with our turnkey platform and help merchants scale globally with our network of over 250+ couriers. By providing tax and duty costs right at checkout, we provide your customers with the fully landed costs, giving them peace of mind that there will be no surprise charges.
Sign up for a free Easyship account today to supercharge your shipping and go global!