How to prepare for new EU VAT rules before July
Between Brexit and the pandemic it’s been a tough time for lots of businesses exporting to or importing from the EU. And there’s another change you’ll need to prepare for if you’re one of them. From July, new EU VAT rules are coming in that could cost you an extra £8,000 a year.
With so much going on, it’s reasonable that you might have missed or forgotten about this change. To help you transition smoothly, we’ve put together a brief guide of what’s happening and how it will affect UK businesses selling to EU customers online.
From July, if you sell your goods to customers in the EU online you’ll need to make sure that you’re paying EU VAT in one of the countries your transactions happen in. For businesses that sell less than €10,000 of goods annually to the EU, HMRC will no longer be able to settle it for you with the EU after your UK tax return.
The change was originally designed to combat VAT fraud by non-EU online sellers that was estimated at around €7 billion. The UK wasn’t a target for the change, but due to Brexit we’re now subject to the same rules as the rest of the world.
The changes will affect around 26,000 ecommerce sellers who have customers in the EU. If that’s you then here’s what to be aware of:
- You can register to pay tax in one EU state to cover all EU countries under the ‘one-stop shop’ system (OSS)
- Microbusinesses that used to enjoy low-value VAT exemption will now be liable for VAT on all sales. So if your total cross-border sales come in under €10,000 you’ll now have to start paying VAT regardless
- VAT exemptions for SMEs and shipments that are under €22 will also end
- Marketplaces can cover the VAT for you
The EU commission has estimated that this change will cost non-EU ecommerce sellers around £8,000 each year. For some businesses this will be a barrier – but not one that is too tough to overcome. For others, it might make them consider doing business somewhere else.
It’s worth remembering that the UK did the same thing to EU suppliers back in January when Brexit legislation came into effect. Since then, British companies have been able to take back some market share.
1. Sort out your numbers – how much business do you do with the EU? Ask yourself if it’s significant enough to be worth the extra admin and costs of settling the VAT directly. It’s worth speaking to your accountant to figure out exactly what you can afford and thinking of alternative revenue streams or customer bases if you decide you want to avoid the implications.
2. Decide how to pay – if you’re happy to continue trading with the EU then you’ll need to work out how you want to pay the VAT you’ll owe. You can:
- Register for VAT in the country where you sell most of your goods
- Choose a third party marketplace to sort the tax out for you (e.g. Amazon or eBay)
- Ask the postal service to handle VAT
If you sell through a marketplace, although they’ll be deemed the VAT supplier and will pay the VAT for you, it’s not cheap. They can charge a fair amount for this service – often around 30%. So it’s worth tallying the difference depending on how much you’re expecting to sell to EU customers. If you’re selling a lot then paying 30% of the revenue on every item might not make sense.
3. Get your tech in gear – is your software ready? If you want to charge VAT to your customers at the point of sale then you’ll need to make sure you’ve got the tech in place for that to happen. Likewise if you’re going to sell through a marketplace then you’ll need to be quick to register and get set up.
This change is only affecting British companies due to our having left the EU. Because of this, HMRC has announced that the government will help SMEs with their transition over to the new EU VAT system. The £20 million Brexit Support Fund is available for small businesses to claim up to £2,000 to help them deal with Brexit-related issues like this. So if you need to fund improvements to your software or pay for professional accounting advice, consider applying for a grant.
The government-backed Recovery Loan Scheme is also available to help SMEs manage their working capital. Although the scheme is directly linked to the pandemic, as long as your business has seen some effect from that too (good or bad) then you can apply. Eligible viable businesses can get between £25,000 and £10 million at more favourable rates than usual.
The change will introduce new costs as well as added complexity for small businesses. For those who do enough businesses with EU customers, the burden may seem frustrating but might be worth it in the long run. Work out how much time and money it’s likely to cost you and plan accordingly.
You can find further details about the change on the European Union website.