As I write this in mid-December, there is no Brexit trade agreement between the U.K. and the E.U. Businesses in the U.K. have no idea what will happen on January 1, when the U.K. formally exits from the E.U. [Editor’s note: An hour after we published this article, E.U. and U.K. officials announced a Brexit agreement.]
Certainly importers and exporters will experience headaches. Manufacturers could have hiccups in obtaining raw materials, which could lead to price volatility.
However, it’s less of a problem than it appears for ecommerce retailers. The cost of the goods may change. But so long as they adjust their selling prices to match the cost, most U.K. retailers will carry on.
Value-added tax
The real problem for U.K. merchants will be adjusting to changes in the E.U.’s value-added tax. The changes — which apply to non-E.U. businesses that sell to E.U.-based consumers — were originally to commence on January 1, 2021. The E.U. has postponed them to July 1. Presumably U.K. businesses will be outside of the E.U. then and will apply the same rules as companies in the U.S. and elsewhere.
In simple terms, the changes apply to businesses that sell more than €10,000 of goods annually to E.U. consumers. This is roughly $10,000 at current exchange rates. The exemption to goods under $22 is going away. All goods must have a VAT charge come July 1.
For orders under €150, this charge can be levied by customs or the postal couriers and not collected by the retailer at the point of sale. This would mean a surcharge applies to the retailer as the sender of the goods or the customer as recipient. Neither is appealing.
The amount of VAT depends on the rate of the destination country. There are 27 countries in the E.U. and 27 VAT rates. Moreover, VAT-eligible goods vary among countries.
However, a non-E.U. retailer has to register for VAT in just one E.U. country — not all 27 — provided that the retailer must register in all countries where it has a physical presence, such as an office or warehouse. Otherwise, pick a country. Ireland is a good candidate for U.S. companies as there are no language barriers.
Regardless, once registered, merchants must file a quarterly return detailing the sales and VAT due for each country. The payment must accompany the return. To help, the E.U. will implement a universal declarative system to file and expedite returns for all countries in which a company is not registered. A separate return is required for registered countries.
Winners and losers
Pricing and classifying goods on an ecommerce site will be a nightmare. Plugins, such as for WooCommerce, will help. The main problem will be making sure that products are in the right category, so the correct VAT rate is assigned. Staying current on VAT rates will be challenging, too.
The added administrative burden will likely result in many foreign retailers avoiding E.U. consumers directly, opting for online marketplaces such as Amazon and eBay. Those marketplaces are the “deemed supplier” of the goods and would thus assume the VAT responsibilities. Presumably this will help cement the marketplaces’ domination. Indeed marketplaces are encouraging the VAT changes as it drives more business their way.
The U.K. is introducing an almost identical set of rules as the E.U. Marketplaces will be the “deemed suppliers” and thus responsible for VAT. Independent, non-U.K. retailers will have to register and charge VAT if they want to continue selling into the country. The main difference is that the U.K. rules start on January 1.
It is easy to see why the E.U. and the U.K. are doing this. It helps local merchants over foreign competitors. It does not necessarily help E.U. and U.K. consumers, however, who could end up paying more for goods and services.
The losers are small retailers who have traditionally sold to E.U. and U.K. consumers. Those retailers have thrived by providing better service at competitive prices. Now administration and taxes are destroying it all. It’s a pity.
