The European eCommerce market has recently seen some colossal changes, bringing challenges unseen in previous eras. 2020 kicked off with Brexit, and with the aftershocks still rippling the waters as well as the global pandemic driving an online shopping frenzy, retailers have been kept on their toes, dealing with new regulations and a booming surge in business.
Now there is another change on the horizon for sellers to get to grips with. On the 1st of July the EU is introducing new VAT rules for businesses selling goods to customers, changing how sales tax will be collected. This will have a big impact on each part of the supply chain from marketplace vendors to postal operators.
Why are the rules changing?
- Simple cross-border trading
For companies trading within the EU, the new rules will make things a lot more straightforward. Simplifying the threshold for VAT across EU members and creating a new registration process with the One Stop Shop (OSS) aims to do away with reams of bureaucracy and administration costs, saving time and money for vendors.
- A level playing field for EU businesses
The new regulations aim to make the competition fair between local entrepreneurs contending with traders from outside the EU. By abolishing the small consignment relief for imported goods, the European Commission is looking to ensure that the same rules apply to everyone and that there is a fairer market for sellers trading within the EU.
- Closing the tax gap
Changes to the VAT exemptions for imported goods will also mean an increase in revenue for member states. The VAT Gap Report stated that in 2017 there was an estimated €137.5 billion deficit in the actual amount of tax collected compared with the amount of VAT revenue expected in the EU. It is thought that the tax optimisation of online businesses will help to address fraud and retrieve €7 billion of this deficit annually for the public purse. VAT will be paid where the consumption of goods and services takes place.
What exactly is changing?
- New thresholds for EU distance sales
The current system requires anyone selling goods within the EU to register their VAT in each Member State when their sales meet a certain threshold, and this amount varies from country to country. Under the new rules these thresholds will be abolished and replaced with one EU-wide threshold of €10,000. This means that if your total sales within the EU exceed this amount, then you will have to pay the local VAT percentage of the country or countries you are selling to.
For example, if your total sales within the EU amount to €15,000 i.e €9,000 in France and €6,000 in Germany, as this exceeds the threshold allowance you will need to pay VAT in France and Germany according to the tax rules relevant in each country.
This does create an exemption for micro-businesses whose distance sales are under the €10,000 marker. If they have traded below the threshold for the last two years then they will be granted to charge the VAT rate local to where the goods are shipped from, whilst still submitting tax to their local authority.
Online sellers within the EU can register to use the One-Stop-Shop to declare and pay VAT on all goods that are shipped to other EU countries.
- No more small consignment relief
Currently any goods imported from outside the EU that have a total value below €22 are not subject to VAT. As of July 1st, this will change, and tax will be levied on any items coming from a third territory or third country, or other states outside the EU.
The VAT can be collected by merchants for consignments with a value below €150 through the Import One Stop Shop (IOSS). This new system aims to simplify the tax collection process for buyers. The benefit is that once VAT is declared through the IOSS, there will be no import tax imposed on the items on entry to the EU.
What if the supplier is not registered with the IOSS system?
The custom clearance will need to be arranged by another party. VAT will be claimed from the customer through either a postal or logistics company, or a customs official who will need to determine the value of the order. A clearance fee may also be added for processing the tax. This does not make for a pleasant shopping experience for the consumer: - it likely that they will not want to be hassled to pay more on products they have already purchased and may refuse to pay, meaning the goods will be stuck.
There will be steps to simplify the process for distance sales of Imported goods in consignments not exceeding €150 if IOSS is not used.
- More responsibility for marketplaces
Another major shift coming to international eCommerce and the selling of goods by vendors outside the EU to buyers within the EU is the change in the role of online marketplaces when it comes to the collection of VAT. New regulations mean that this liability now falls on those considered to be ‘deemed suppliers’; a definition that could include the online marketplaces/platforms used by sellers...
What are ‘deemed suppliers’?
Deemed suppliers are any online marketplace or platform which facilitate:
- Sales of goods with a value less than €150 imported by EU or non-EU sellers to EU customers.
- Sales of goods of any value sold by a non-EU seller to an EU customer.
A platform is considered to be facilitating the sale if:
- It controls the general terms and conditions of the sale;
- It authorises the charge to the customer for supply of the goods
- It takes part in the ordering or delivering the goods.
If a marketplace merely advertises goods, provides a payment function or provides links to other shopping platforms then they will not be considered to be facilitating the sale and therefore not a ‘deemed supplier’.
However, should the criteria for becoming a ‘deemed seller’ be met, then the marketplace will become responsible for collecting the VAT from the customer at the rate in force in the country where the buyer is located. There is also a requirement that platforms keep records of all sales transactions for 10 years whether they are a ‘deemed seller’ or not.
Ripping off the red tape
The One-Stop Shop, which is being introduced by the European Commission on July 1st, is an electronic portal that can be used by eCommerce businesses to file and pay VAT in a simplified way, promising to reduce the red tape by up to 95%.
There are three schemes within the OSS, and their applications depend on the type of business, the country in which it’s established, and the type of activity that takes place. However, each scheme has the same objective- to keep the red tape to a minimum and make VAT declaration a less agonising process:
- Non-Union OSS Scheme: This scheme is for non-EU businesses who sell services to non-taxable persons i.e. private individuals. Registration takes place in a single country and all sales activity is reported through a single quarterly VAT return. The scheme has been extended from just applying to electronic services to including all services.
- Union OSS Scheme: This applies to EU businesses selling goods and services to customers in other EU countries, non-EU businesses carrying out distance sales of goods only, and ‘deemed suppliers’ who facilitate distance sales and domestic sales of goods. A single quarterly VAT return can be submitted to account for these sales.
- Import OSS Scheme: Open to any business, the import scheme is designed to facilitate exempt imports of goods from outside the EU, with a value below €150, sold to customers within EU countries. The customs declaration is also simplified. For consignments with a value higher than the threshold, import VAT and duties will continue to apply. IOSS returns should be completed monthly.
It is important to note that if your business is based outside the EU, you will need to employ a VAT intermediary to act as an agent on your behalf.
Get prepping for the change
If you think that signing up to the OSS is the right choice for you, the registration process is open and the systems will be launched for use on July 1st. There is no deadline - activation will take effect at the start of the next full quarter after you complete the application. Each country in the EU has an online portal where you can register. Remember you only need to register in one country to be able to record sales to customers in other EU states.
If you sell goods through a marketplace, make sure you review your contract in order to clearly understand where the VAT accounting responsibilities lie. If you use an eCommerce platform that is not a ‘deemed seller’, you may need to modify your software to exhibit variable VAT rates for customers in different countries.
It may be perplexing at first, but the ultimate goal is to lighten the load when it comes to cumbersome tax filing. Understanding the role of your business and what is expected of you is the first step in embracing the changes. Whilst they are meant to be simple, the varying scenarios in distance selling and cross-border services can make it tricky to grasp which scheme is the right one for you. When the dust settles, it’s likely the one-stop simplicity will be a welcome relief for you and your business.