What does the VAT E-Commerce package mean for finance teams?
The UK’s e-commerce sector is one of the most vibrant and developed in the world and, not surprisingly, many online retailers saw dramatic growth during the pandemic. Government figures reveal that online sales reached an all-time high in November 2020, when they accounted for 36.4% of retail sales in the UK, before peaking again in January when the country was in lockdown.
As well as seeing considerable success at home, cross-border sales for UK firms also jumped by 57% year-on-year (YoY) in 2020, partly driven by a surge in activity in the EU before Christmas.
Whether or not this growth rate will continue now the UK has formally left the EU remains to be seen. Finance leaders are certainly optimistic that any issues due to Brexit will be short-lived. According to a survey by Deloitte, around 10% of CFOs experienced major disruption as a result of Brexit – but just 3% expect to see similar levels of disruption in a year’s time. The end of the transition period brought new rules and considerations for finance teams – however, one measure, which comes into force on 1 July, is set to make it easier for online retailers to fulfil their VAT obligations. By reducing complexity, it’s hoped that e-commerce firms will be able to continue trading freely across Europe.
The VAT e-commerce package explained
The VAT e-commerce package follows the Mini One Stop Shop (MOSS), which was first introduced in 2015. MOSS aimed to simplify the process of declaring and paying VAT on telecommunications, broadcasting and electronic services delivered in the EU, and the VAT e-commerce package is set to do the same for ‘distance sellers’ supplying goods direct-to-consumers (D2C).
As part of the scheme, businesses established and trading within the EU are being invited to sign up to the Union OSS (One Stop Shop). Those established outside the union and selling goods to consumers in member states, including the UK, should use the Import One-Stop Shop (IOSS).
Although membership to either scheme is voluntary, there are obvious advantages. For a start, it helps to improve customer experiences because buyers are only charged at the point of purchase, rather than having to pay on delivery. They should avoid the transporter’s customs clearance fee too, so cross-border purchases become less costly.
Online retailers who don’t join the scheme would have to register for, declare and pay VAT to individual countries where transactions take place, which is likely to cause a major headache for finance teams. It’d be even more difficult for anyone selling high volumes of low-cost goods, particularly as items worth less than EUR 22 will no longer be VAT exempt after 1 July.
Managing the VAT e-commerce package
The good news is the VAT e-commerce package should be fairly straightforward for finance teams to manage, and is certainly better than opting out.
Using the VAT settings in your e-commerce platform and accounting software, simply set the VAT rate for each location, so the right amount is automatically added when you make a sale. Sellers who use Amazon and eBay should be aware that, under the scheme, marketplaces are liable for VAT, not them. Again, this shouldn’t cause a problem, since you supply the item to the marketplace at zero-rate VAT and record that on your VAT return.
Coupled with the zero-tariff agreement, which applies to most sectors including retail, the VAT e-commerce package is a positive step for UK retailers who want to grow their presence in the EU. Of course, there’ll always be changes and new regulations for businesses, regardless of Brexit. What’s important is that your financial management systems allow you to meet your obligations without creating further complexities.
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