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EU VAT changes and what they will mean for UK businesses

Author: ICAEW Insights

Published: 28 Jun 2021

UK companies need to ready themselves for the imminent VAT rule changes when selling to EU consumers (ie B2C transactions), as the changes will see them taxed according to the local VAT rate applicable in each EU country.

With less than a week to go until the new e-commerce VAT rule changes in Europe take effect, businesses must ensure their websites and pricing structures comply with the new tax regime. 

From 1 July, all UK businesses that sell to EU consumers and are responsible for delivering the goods will need to ensure that the correct rate of VAT is declared on the sale of the goods. The VAT rate will be the rate of the consumer’s country. As each EU country will have different VAT rates, this may require considerable changes to websites. Businesses will need to ensure they are correctly registered within the EU.

Essentially, the new system attempts to put EU and non-EU businesses on an equal footing. Previously, thresholds for current distance selling regulations were so high that many sales were not taxed locally, so EU member states were missing out on VAT revenue.

The new system attempts to rectify this: all goods and services sold to EU consumers will now be taxed according to local rates.

But Sue Rathmell, partner at MHA MacIntyre Hudson, is concerned that many UK businesses are not aware of the changes and will face significant challenges in the not-so-distant future if they are not adequately prepared for them. 

“We’re still dealing with a lot of businesses that haven’t even heard of the tax changes and what it will mean for them,” she told a recent ICAEW webinar. “Yet these changes are quite significant. Many won’t be aware they have to register for VAT in the EU or make huge website changes, or any of the other rules they’ll have to follow.” 

The new rules will affect businesses that sell and are responsible for the delivery of goods to EU consumers. For sales valued below €150 per transaction, businesses can choose to register for the EU’s Import One Stop Shop (IOSS) or register in each EU country in which they have a domestic customer. The IOSS facilitates the collection, declaration and payment of VAT on behalf of UK sellers through a prior-appointed EU representative if the seller has no current establishment in the EU itself. The IOSS system also ensures that the supplier accounts for the correct amount of VAT at the time of purchase from within the gross amount paid. 

Businesses selling B2C goods and services valued above €150 per transaction will be required to register for VAT in every EU member state where they make such sales.

To avoid liability for local VAT on the sale, businesses must change their terms of sale so that their customer is responsible for importing the goods into their country. The customer will have to pay the import VAT and any customs duty, but businesses must make this clear to their customers at the point of sale. If they don’t, then Rathmell says businesses could face similar problems to those we saw earlier in the year when UK consumers were asked to pay import VAT on their doorsteps in addition to couriers’ own charges. “It cost businesses sales and reputation,” she comments.

Businesses could also opt to have their delivery provider pay the VAT and any duties at the point of import into the customer’s country and have the costs charged back to them. This might not be the most cost-effective way of dealing with the changes but might mean that businesses can at least carry on selling goods on 1 July.

Businesses that decide to use IOSS need to make changes quickly. “Imagine you sell children’s clothes to EU consumers,” says Rathmell. “You will need to change your entire website, including the coding and calculations for new pricing structures so that it automatically calculates the correct rate of VAT for a consumer in France, for example, and then a different rate for a consumer in Latvia. So, huge changes to systems are required and quickly. You can’t go back to the consumer after the event and say ‘sorry, we charged you the wrong rate of VAT, you owe us more’. Instead, businesses will then be out of pocket.” 

 In Rathmell’s view, smaller businesses are likely to be ‘disproportionately affected’ by the tax changes. Many, she says, just won’t have the money to invest in additional time and resources. 

“Smaller businesses are the ones likely to lose out the most from this,” she says. “Larger e-commerce businesses will have their own tax teams and money to invest. But if you’re making T-shirts and only making a few thousand pounds from the EU, the new tax system just won’t be worth your while. Ultimately, I think we’ll see a lot of businesses decide to stop selling into the EU because of the cost of doing so.”

So, what should businesses be doing now to ensure they are ready for the new EU tax changes?

“They need to get a move on,” Rathmell insists. “Businesses need to be looking at their sales and analysing them into two categories: sales that fall below the €150 threshold and sales that are above it. They need to decide whether to register for VAT in the EU or register for IOSS and appoint an EU representative or have their courier charge the costs back to them or require their customer to pay the VAT. Whichever way they choose, they need to prepare their website so that it deals with the correct VAT rate for every EU country They then need to talk to their courier or transport operator to ensure they have necessary details such as their IOSS registration number and so on. And they need all this up and running by 1 July.” 

ICAEW webinar: E-Commerce VAT changes in Europe: get ready for the new tax regime