E-Commerce 2021: Big changes to VAT compliance requirements within EU and UK
In a further attempt to remove some of the barriers to e-commerce trade and to enable more efficient and less burdensome international VAT compliance, there will be some big changes to e-commerce VAT requirements. Within the United Kingdom, these changes will be introduced on 1 January 2021 following Brexit. Within the EU the changes will be introduced on 1 July 2021
These changes will have a big impact on business operating under the current distance sales rules.
Why are these changes being introduced?
Distance sales rules were first introduced to level the playing field for online sellers across Europe and to stop VAT rate shopping. These rules currently mean that if you sold goods online to consumers around Europe and you dispatched those goods from one EU Member State to the Member State of the consumer, you would be obliged to VAT register in the Member State of the consumer if your sales breached the distance selling threshold in that country.
This meant that as a consumer if you purchased the goods locally or from a supplier in another Member State you would be charged the same rate of VAT.
This however, increased the VAT compliance burden for online and distance sellers to consumers as it often resulted in multiple VAT registration obligations as distance sales thresholds were breached.
These rules also didn’t address the low value consignment relief in place in the UK and around Europe, which gave non-EU sellers an advantage in that they could sell goods up to a certain value without any VAT charge to the consumer.
The rule changes being introduced by the UK and the EU in 2021 will address these issues.
The changes within the United Kingdom
From 1st January 2021, the UK (excluding Northern Ireland) will introduce two key changes that will impact online sellers into the UK:
- The current £15 low value consignment relief (LVCR) for imported parcels will be scraped, and
- Marketplaces in some cases will be made responsible for VAT on seller transactions. The marketplaces will become the “deemed seller”.
With the scrapping of the low-value consignment relief, HMRC will want to simplify VAT collections and parcel processing for customs. The import VAT collection process will therefore be shifted from the border to the seller’s website. This will be limited to parcels that do not exceed £135. Sellers will charge and collect output VAT from their UK customer during online checkout. Sellers must therefore VAT register in the UK to report the related output VAT they charge and collect.
B2B transactions below £135 would also be subject to the new regime. However, where the business customer is VAT registered in the UK and provides its valid VAT registration number to the seller, the VAT will be accounted for by the customer by means of a reverse charge. Any parcels above £135 would be subject to the current rules: VAT and duties must be settled at UK customs before the goods can be passed to the customer. This may be done by the seller, or the customer.
HMRC is also considering passing the VAT rights and obligations of certain seller transactions over to the marketplaces that facilitate them. The marketplace would become the ‘deemed supplier’ for VAT. This procedure is also included with the EU e-commerce package due to take affect from 1 July 2021.
If a marketplace facilitates imported sales by any sellers into the UK not exceeding the £135, or sales of goods already within the UK by non-UK resident sellers;
- The seller would first make a deemed zero-rated supply to the marketplaces.
- The marketplace would make a domestic UK supply, with UK VAT, to the UK consumer.
- The marketplace would declare the VAT in its own UK VAT return.
HMRC has issued the following policy paper in this regard.
The changes within the European Union
From 1st July 2021, the EU will introduce a number of key changes that will impact online sellers for sales within the EU and into the EU including:
- The extension of the scope of the MOSS, turning it into a One-Stop-Shop (OSS) to:
- B2C supplies of services other than telecommunication, broadcasting and electronic services (“TBE” services)
- Intra-EU distance sales of goods
- Distance sales of goods imported from third countries and third territories under EUR 150, and
- Changes to Marketplace obligations for cross border and domestic supplies
The EU Commission reports that Building on the success of the MOSS for TBE services, this concept will be extended and turned into a OSS:
- The non-Union scheme for supplies of TBE services by taxable persons not established in the EU will be extended to all types of cross-border services to final consumers in the EU;
- The Union scheme for intra-EU supplies of TBE services will be extended to all types of B2C services as well as to intra-EU distance sales of goods and certain domestic supplies facilitated by electronic interfaces. The extension to intra-EU distance sales of goods goes hand in hand with the abolition of the current distance sales threshold (which will be replaced by an EU wide annual turnover threshold of EUR 10,000 of sales to all Member States);
- An import scheme will be created covering distance sales of goods imported from third countries or territories to customers in the EU up to a value of EUR 150.
With this rule change, the seller will charge and collect the VAT at the point of sale to EU customers and declare and pay that VAT to the Member State of identification in the OSS. These goods will then benefit from a VAT exemption upon importation, allowing a fast release at customs.
The introduction of the import scheme goes hand in hand with the abolition of the current VAT exemption for goods in small consignment of a value of up to EUR 22.
Where the import OSS is not used, a second simplification mechanism will be available for imports. Import VAT will be collected from customers by the customs declarant (e.g. postal operator, courier firm, customs agents) which will pay it to the customs authorities via a monthly payment.
The following “Notice to Stakeholders” has been provided by the European Commission in this regard.
The European Commission has also issued the following explanatory notice within the last few days.
Trade with Northern Ireland
From 1 Jan 2021 transactions involving movements of goods between Northern Ireland and the EU Members States will continue to be considered intra-EU sale and purchases.
All EU rules applying to cross-border supplies and movements of goods between the EU Member States will continue to apply between Northern Ireland and the EU Member States. More information on this can be found here.
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