New EU E-Commerce VAT Rules: Understanding the impact for UK retailers

18 May 2021

Having navigated the challenges of Brexit, UK retailers now face another significant change in the tax framework for selling to EU consumers.

From 1 July 2021, the new EU VAT e-commerce rules will introduce significant changes for UK retailers, marketplaces and postal/courier companies selling to EU consumers. It is crucial that such UK businesses take the time to understand the changes now and the potential impact on them so that they can prepare for 1 July.

Why are the rules changing?

The European Commission’s aim is for the new rules are to:

  • Reduce the costs of complying with cross border VAT rules in the EU
  • Put EU and non-EU businesses supplying EU consumers on an equal footing, and
  • Increase VAT revenues for Member States by bringing more supplies within the EU VAT net and reducing fraud. 

In principle, from 1 July 2021, all supplies of goods and services to EU consumers should be taxed where the consumer is located in the EU. This is a significant extension of the existing provisions and has the potential to create lots of additional EU VAT compliance and reporting obligations for UK businesses if not proactively managed.

To help facilitate compliance and reduce the burden of managing EU VAT accounting obligations, new One Stop Shop schemes are being introduced as part of the reforms. Through these schemes, eligible businesses will be able to register with just one EU tax authority to manage their VAT obligations across the bloc which has the potential to achieve significant administrative and cost savings.

Despite previous delays to the reforms, the EU has now issued comprehensive guidance on how the new rules will work and confirmed that all Member States will be ready to go live on 1 July.  

There are three different One Stop Shop schemes available.

1. Non-Union scheme

The existing Mini One Stop Shop Scheme for a limited range of B2C services is being replaced and any business that is not established in the EU (now including UK suppliers after the UK’s exit from the EU) but which charges EU VAT on services to consumers can now account and pay through the new One Stop Shop. 

The scope of the scheme is being significantly extended from the existing Mini One Stop Shop which only requires non-EU businesses to report EU VAT on telecommunications, broadcasting and electronic services (TBE services) supplied to EU consumers.

2. Union scheme

The existing Union scheme for intra-EU supplies of TBE services will be extended to cover all types of B2C services. 

Additionally, in a significant development, it will be expanded to cover intra-EU distance sales of goods and certain domestic supplies to consumers that are facilitated by electronic interfaces (such as marketplace platforms where the interface will become the deemed supplier for VAT purposes). The extension of the scheme to include sales of goods of consumers also coincides with the removal of the current distance selling thresholds so that EU VAT will almost always be due in the Member State where the final consumer is based.

3. Import scheme (IOSS)

Finally, any business carrying out distance sales to EU consumers of goods that are imported from outside of the EU in consignments not exceeding EUR 150 can register for the import scheme. If the supplier has no establishment in the EU, they may need to appoint an intermediary to be able to use the scheme and we understand that a number of EU Member States are currently discussing whether UK businesses will require such an intermediary.  If required, finding an intermediary may prove challenging.

The new IOSS will require the supplier to charge and collect EU VAT at the point of sale with VAT settled via the IOSS. This will then allow goods to be VAT exempt at the point of import with the objective of fast customs clearance being available. It should also be noted that low value consignment relief into the EU (currently set at EUR 22) will be removed as part of the changes with all imported goods being liable to local VAT.

UK obligations as a result of the reforms

As part of the UK’s exit from the EU, it was agreed that Northern Ireland would remain subject to the EU’s VAT rules in respect of supplies of goods only and the UK has recently acknowledged that it has obligations in respect of implementing the e-commerce package under the agreed Northern Ireland Protocol.  Under these obligations, HMRC will introduce the required One Stop Shops to support VAT compliance but it acknowledges that the relevant portals are unlikely to be ready ahead of 1 July 2021.  Further guidance will be released in due course ahead of the 1 July for impacted businesses.

The recently released guidance from HMRC underlines the continuing complexity faced by businesses in Northern Ireland and those operating under the Northern Ireland Protocol given that ongoing compliance with EU VAT rules is required.

Impact on retailers

In summary, this means that a UK retailer, marketplace or postal/courier business may be affected in one of several ways depending on the supplies they make to EU consumers such as:

  • B2C supplies of services in the EU
  • Intra-Community distance sales of goods and (for deemed suppliers such as marketplaces) domestic supplies of goods
  • Distance sales of imported goods in consignments not exceeding EUR 150.

As more guidance is released by the European Commission, local tax authorities and HMRC, the potential complexities of the package of reforms for UK businesses are becoming clearer and underlines the need for early action by affected businesses. For many affected UK businesses, making use of one of the One Stop Shop schemes is likely to be significantly advantageous compared to the potentially onerous obligations of normal VAT accounting in each EU member state. Additionally, the recently released guidance from HMRC in respect of Northern Ireland emphasises the complexities for affected businesses.

Businesses will need to plan early to ensure they are able to register in time and in a suitable Member State in order to be compliant from the implementation date. For example, registrations for some of the One Stop Shop schemes can only take effect from the start of a calendar quarter meaning a missed deadline could be costly. 

In addition, there are strict compliance and record keeping rules that will be new to UK businesses seeking to use the One Stop Shop schemes. Failure to comply with these carries potentially high penalties and could result in businesses being barred from the One Stop Shop schemes - with obvious implications for ongoing VAT compliance.

Finally, for businesses without an establishment in the EU that wish to use the IOSS, advance planning will be needed to try to identify and secure the services of an appropriate intermediary ahead of the new rules coming into force if required.

How BDO can help

We are working with a number of businesses to help them understand what the changes mean in practice for them. We are running facilitated workshops for businesses to flesh out the issues, help them understand the new rules and the specific implications for them. 

If you would like further information on the new rules or how we are supporting our clients in respect of these changes, please get in touch with Richard Hogg or your usual BDO VAT contact.

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