The UK government has made digital marketplaces such as Amazon and eBay the duty of tax agents to collect VAT from sellers. That is, in addition to Brexit, a number of major changes were made to the British VAT registration system, which
came into force on January 1, 2021. In this article, we will briefly outline the key points that ecommerce business owners need to be aware of.
Previously, a business using marketplace services had to calculate its own tax liability for VAT, which led to a number of abuses and cost the budget 1-1.5 billion pounds per year.
Are you planning to register a company in the UK and do business online through marketplaces? Contact our experts for help and legal support in registering a company in one of several UK jurisdictions, as well as opening a corporate account in its name. You can find more information at the end of the article.
How events developed in the European market
Initially, both the UK and the EU planned to introduce VAT changes for e-commerce (marketplaces) at the same time on January 1, 2021. However, due to the coronavirus pandemic, the EU has delayed making changes to e-commerce until July 1, while the UK has not.
Many sellers have misinterpreted these announcements to mean that Amazon and other marketplaces are now responsible for collecting all VAT in the UK. This is not true, marketplaces charge only under certain scenarios.
VAT changes for e-commerce in the UK
There are four major changes to the UK tax regime. Let’s look at each item in detail.
Tax exemption for low value parcels up to £15 (LVCR)
LCVR currently means that goods worth £15 or less are not subject to UK import VAT. Previously, for items sold for more than £135, sellers or their postal services had to declare and pay domestic VAT directly to HMRC, but now from £15.
As of January 1, HMRC announced that LVCR has been abolished and imports up to £135 are subject to domestic VAT, not import VAT. The collection of tax is transferred to the point of sale – an online store or an online trading platform.
Traders selling goods up to £135 directly to consumers through their own websites (without using a marketplace) need to register and account for UK VAT on imports per consumer from 1 January 2021 as a shipping agent. Instead, domestic VAT is taken into account, which applies to sales of EU imports and sales not currently included in the £15 low value shipping allowance.
If you have an online store like Shopify, Wix or Squarespace and sell products imported directly to UK consumers, you need to start counting UK VAT on every sale.
Since the end buyer on the marketplace will only see the final sale price, this means that for most businesses, 1/6 of the profit will be lost due to VAT.
For example, if you sell an item for £24, the price includes 20% VAT. So based on the final selling price, £20 + £4 VAT is charged. If you want to maintain the current rate of return, you need to increase the current selling prices by 20%.
If you are selling goods through a marketplace such as Amazon, Esty or Ebay and you are importing into the UK directly to consumers, then the marketplace facilitating the sale is responsible for collecting and charging VAT. The tax is applied to the consumer at the time of sale through the cash desk on the trading floor. You, as a seller, are delivering to the market at zero rate, including this amount as zero on your UK VAT return.
For domestic UK sales through marketplaces, nothing changes and existing rules still apply. For example, if you sell on Amazon or Ebay and your items are shipped and sold within the UK, these changes will not affect the VAT calculation.
Deferred Import VAT Scheme
As a result of Brexit, the delayed scheme means that when importing goods into the UK, it is no longer necessary to pay cash to clear the goods through customs. Instead, import VAT must be included on the declaration.
Deferred posting can be used to post VAT on imports if:
- Goods are imported for business use.
- The company has an EORI GB number and it is used on the customs declaration (usually linked to your UK VAT number.
- The taxpayer number is indicated on the customs declaration.
If you are not registered as a VAT taxpayer, you will not be able to account for import VAT in this way. Instead, import VAT must be paid when importing goods.
Delayed posting does not apply to items in lots not exceeding £135.
EU Distance Selling Thresholds (DST) no longer apply to UK sales.
Until June 30, 2021, distance sales from the UK to the EU were treated as exports and subject to zero value added tax.
EU businesses selling products from the EU directly to marketplace consumers need to register for VAT in the UK. From July 1, the VAT MOSS scheme has been expanded from digital products to physical products. At this stage, UK businesses can do distance selling in the EU under this scheme without having to register directly in every EU jurisdiction.
From an EU perspective, these sales are subject to import VAT on arrival. This can have an adverse effect on the consumer as his goods are held at customs until import VAT is paid. This is not good for e-commerce businesses (marketplace) because customers will have to pay more and they will not be happy and will most likely leave negative reviews.
EC Sales Lists (ECSL) canceled for UK businesses
As of January 1, 2021, UK companies will no longer be able to sell EC.
For marketplaces within the UK, the VAT situation will remain largely unchanged and no action needs to be taken. The only difference is if you ship directly to consumers outside the country.
So the marketplace now collects VAT on behalf of suppliers on all B2C sales. However, you still need to account for VAT on B2B transactions yourself.
Different methods of accounting for B2B or B2C sales
The key change is that B2B (business to business) and B2C (business to consumer) transactions now have slightly different accounting methods when goods are sold from overseas.
Because Amazon is a marketplace, most transactions are B2C. However, this does not mean that all transactions take place in the B2C format.
For B2C transactions – Amazon and marketplaces charge tax under the following two scenarios.
- If items (up to £135) are sold on the marketplace and shipped directly from outside the UK. If you are a non-UK seller shipping from outside the UK to UK consumers, this rule applies to you. If you are a UK seller and your items are shipped from a UK marketplace, this does not apply to you.
- If goods of any value are sold on the marketplace to UK consumers and the seller is not registered in the UK. If you are a UK seller, this does not apply to you.
For other transactions (including B2B transactions), the rules do not change. The marketplace does not charge VAT, and the seller must account for VAT, as before January 1, 2021.
What rates to use in the VAT return?
If the marketplace collects VAT on your behalf, then you should treat the transaction as having a zero rate (e.g. 0% VAT) on the declaration and report it in column 6. This is an important distinction because a zero sales rating counts taxable supplies that are being made and you have a legal the right to claim VAT refunds.
Since these sales have a zero rate, they are also included in the taxable turnover. Therefore, by using a flat rate scheme, you will be at a very disadvantageous position. Using a flat rate scheme and earning a high percentage of B2C sales, you should consider switching to a standard VAT scheme.