This article is for ecommerce business owners and provides a review of the most important changes to the UK VAT system from 1 January 2021 onward.Find out more
As of 1 January 2021 amendments are being made to the way in which the UK VAT system operates. The alterations relating to ecommerce businesses have been years in the making and were agreed upon prior to the outcome of the Brexit referendum was known.View our packages
The intention had been for the changes to be made on New Year’s day 2021, but in light of the coronavirus pandemic the EU has moved its implementation to 1 July. That the UK did not impose any delay has meant there will be six months’ difference in approach.
To ensure this does not cause undue difficulty to the online businesses affected by the changes, we cover everything of which ecommerce owners need be aware.
Ecommerce VAT Changes: an overview
Here we provide detail on the four major changes to the UK VAT system introduced by the government from the start of 2021.
1. Withdrawal of Low Value Consignment Relief (LVCR)
LVCR previously meant that goods valued at £15 and lower were exempt from import VAT. As of the shift in rules on 1 January, vendors or postal services will have to declare and pay VAT to HMRC on any goods sold at £135 and below. This new regime will have a significant impact on the way in which dropshippers account for VAT.
2. Postponement of Import VAT
Private sellers are also considerably affected. Prior to 2021, import VAT was placed on goods passing through customs and then reclaimed on VAT returns. The changes introduced a new procedure. Now, import VAT needs to be declared on businesses’ UK VAT returns with nothing being paid on imported goods as they arrive.
3. UK sales no longer subject to EU Distance Selling Thresholds (DSTs)
Up until 30June the goods UK ecommerce businesses export to EU customers will move from being classified as distance sales to being UK exports and zero rated. Businesses located in the EU are now required to register for UK VAT. If you are in this position, get in contact and we can help you.
From 1 July 2021 onward, the VAT MOSS framework will encompass digital as well as physical products. Once this happens UK businesses will be relieved of the need to register in each EU jurisdiction separately and will instead be permitted to export to the EU via VAT MOSS.
4. EC Sales Lists (ECSLs) no longer apply to UK businesses
Since 1 January 2021 UK businesses have not been allowed to make EC Sales and so have no further requirement to complete and submit ECSLs.
We will now examine the consequences of each of these four major changes in greater detail.
Withdrawal of Low Value Consignment Relief (LVCR)
Low Value Consignment Relief was in effect prior to 2021 and meant: i) any imported goods with a value of £15 or less were not subject to either Customs Duty or import VAT, and ii) imported goods valued above £15 and below £135 drew import VAT but not Customs Duty.
The withdrawal of LVCR on 1 January 2021 means VAT is now collected at the point of sale – the online market place (OMP) – rather than the point of importation. All imported products valued below £135 will be subject to domestic, not import, VAT.
Vendors offering goods at a cost of up to £135 through their own website rather than an online marketplace such as Amazon are now required to account for, and register, UK VAT. As domestic VAT has expanded to include the import of goods from the EU and sales of products under £15 previously exempted by LVCR, it is no longer the responsibility of delivery agents to collect import VAT from customers.
There are no changes for sales on online marketplaces within the United Kingdom. This means that a vendor operating on eBay or Amazon and sending a product from a location within the UK to a customer within the country has no need to change any of their practices with respect to VAT calculations.
Consequences for vendors operating from their own online store
Traders directly importing goods to customers within the UK and selling through an online store such as Wix, Shopify or Squarespace are now tasked with accounting for UK VAT on each of those transactions.
Customers only see the price they end up paying. For the majority of businesses it means they now lose 1/6 of their profit margin to VAT. For example, a product selling for £24 now includes VAT of 20%, so based on final selling price the charges break down as £20 +£4 VAT because 1/6 of £24 is £4. For the trader to retain their pre-2021 profit margin, their new prices will have to have been increased by 20%.
The good news is that we provide a comprehensive service for all matters related to VAT registration. So if you are a dropshipper selling products from outside the European Union and importing them into the UK, get in touch with us now and we’ll be able to help you put everything in order.
Consequences for vendors operating through an online marketplace
Where trading involves the direct importation of goods to customers within the UK through online marketplaces such as eBay, Amazon or Etsy, responsibility for collecting and charging VAT has now passed to that online marketplace. This means it is imposed at the checkout whilst the vendor includes the amount as zero rated on their UK VAT return.Find out more
Postponement of import VAT
In the past, ecommerce businesses had to pay import VAT when their goods were brought into the UK before subsequently reclaiming it on their VAT return. From 1 January 2021 importers no longer hold a duty to pay VAT upon the arrival of goods. They are now required to declare and recoup import VAT on the same VAT return which results in a NIL cash impact.
Since the changes, postponed accounting is appropriate for use with respect to VAT where:
- Goods are being imported for business use
- The business holds a GB EORI number that is also used on the customs declaration, something that is usually linked with UK VAT numbers
- The business’s VAT number appears on the customs declaration
Those businesses that are not VAT registered in the UK will not be permitted to account for import VAT in this way. They will have to pay import VAT at the moment the goods have been imported.
Where postponed import VAT accounting does not apply
There are different regulations in force for goods in packages below £135. We covered these in the �Withdrawal of Low Value Consignment Relief (LVCR)’ section earlier in this article.
Completing VAT returns under the Postponed Import VAT scheme
For imported products it is now necessary to account for import VAT on the VAT return for the period during which those products were imported.
Import information is now available through a new online account that provides a monthly statement that can be downloaded for record keeping. This is akin to monthly C79 documents and will show the aggregate of import VAT postponed for the previous month, information which needs to be included in VAT returns.
The changes to how VAT returns now need to be filled-in are:
- Box 1 needs to include the VAT that was due during the period on imports accounted for through postponed VAT accounting
- Box 4 needs to include the VAT that was reclaimed during the period on imports accounted for through postponed VAT accounting
- Box 7 needs to include the total importation value, excluding VAT, of all goods included on the monthly online statement
UK sales no longer subject to EU Distance Selling Thresholds (DSTs)
EU Distance Selling Thresholds stopped applying to sales moving from the UK to the EU on 1 January 2021. This has the effect that all sales from the UK are treated as exports and so are zero rated for UK VAT purposes.
At the EU end, such sales are subject to import VAT upon arrival. This may have the unforeseen and unfortunate effect on consumers of their goods being held at customs until import VAT has been paid. Such a state of affairs is not beneficial for ecommerce businesses because customers will be unhappy and post negative are required to pay more
Such a state of affairs is far from ideal because customers are unlikely to be pleased at having to pay an unexpected extra charge for their purchase. Should that come about they may well complain or leave negative reviews, a course of action that will mean ecommerce businesses run the risk of suffering reputational damage for something that is beyond their control.
We will advise on VAT changes due to be introduced by the EU on 1 July 2021 once they have been finalised.
EC Sales Lists (ECSLs) no longer apply to UK businesses
Businesses that have supplied goods or services to businesses in the EU no longer need to submit EC Sales Lists.
We have compiled a guide on everything you need to know about how to register, including the steps you need to take to do it for yourself. Please contact us if you would like either a copy of that guide or for us to take care of those necessary steps for you.Find out more