Ecommerce VAT Changes (in 2021)
On top of Brexit, there are a number of major changes being introduced to the UK VAT system that are being brought into effect on 1st January 2021. This article summarises the key points that ecommerce business owners need to be aware of.
Note (October 2020): Both Brexit and COVID-19 have previously caused delays and changes to the plans made by the UK Government. There may be a chance that the changes discussed in this article will be pushed back to 1st July 2021 (aligning with the EU's planned VAT changes). If and when this happens we will update the article accordingly.
There are a number of changes to the UK VAT system that are being introduced on 1st January 2021. While some of these changes are a direct result of Brexit, others - those targeting ecommerce businesses - were planned by the EU before the UK decided to leave. Originally, both the UK and the EU planned to introduce the ecommerce VAT changes simultaneously on 1st January 2021. However, due to the coronavirus pandemic, the EU has postponed its changes to ecommerce VAT until 1st July 2021, while the UK has not. This difference in EU/UK VAT approach causes an additional complication for 6 months, however, we cover everything that you need to know in this article.
These changes are specifically targeting ecommerce businesses and how they account for VAT, so if you are an online business owner this will affect you.
Summary of Ecommerce VAT Changes
There are four major changes that will be introduced to the UK VAT regime on 1st January 2021. We will summarise all four changes here and will expand on each point in sections below.
- Scrapping of the £15 Low-Value Consignment Relief (LVCR). The LCVR currently means that goods valued at £15 or less are not subject to UK import VAT. Removing the LVCR means that for goods sold at £135 or less, sellers or their postal service will have to declare and pay VAT to HMRC directly.
As Accountants for Dropshippers we want to point out that this change will have a big effect on how dropshippers account for VAT. Here is an article that looks at the new rules for VAT for dropshippers.
- The postponed import VAT scheme. This is a result of Brexit and means cash no longer needs to be paid upfront when importing goods into the UK (currently import VAT must be paid so that your goods can clear customs). Instead, the import VAT needs to be declared on your UK VAT return (vs current approach of paying when goods arrive and then reclaiming this on the VAT return).
As Accountants for Amazon Sellers we want to point out that this change will have a big effect on private label sellers. Read Amazon's current guidance on the upcoming changes here.
- EU Distance Selling Thresholds (DSTs) no longer applicable to UK sales. Between 1st Jan 2021 and 30th June 2021 (see future article for changes post 1st July 2021), UK ecommerce businesses selling goods from the UK to EU consumers will no longer count these sales as distance sales. Instead, they will be counted as UK exports and zero rated for UK purposes.
EU businesses that sell goods from the EU directly to UK consumers will need to register for UK VAT. If you are an EU business and need to register for UK VAT get in touch with us today.
Note: From 1st July 2021 the VAT MOSS scheme will be expanded from digital products to include physical products. At this point a UK business will be able to make distance sales into the EU via the scheme without needing to directly register in each EU jurisdiction. An article on this topic will follow.
- EC Sales Lists (ECSLs) will be scrapped for UK businesses. From 1st January 2021 UK businesses will no longer be able to make EC Sales, so will no longer be required to submit and complete ECSLs
Scrapping the Low Value Consignment Relief (LVCR)
At present (pre-January 2021), goods imported into the UK under £15 in value are exempt from both Import VAT and Customs Duty. This is known as Low Value Consignment Relief (LVCR). Goods over £15 but not more than £135 in value attract only Import VAT and not Customs Duty.
From 1 January 2021, HMRC have announced that the LVCR will be abolished and all imported goods up to £135 in value will be liable for domestic VAT rather than Import VAT – therefore moving the point at which VAT is collected from the point of importation to the point of sale. The point of sale will be the online store or the online marketplace (OMP).
For traders selling goods up to the value of £135 directly to consumers via their own websites (without the use of an OMP), they will be liable to register and account for UK VAT from 1st January 2021. It will no longer be possible for the delivery agent to collect the Import VAT from the consumer. Instead, domestic VAT will be due, and this will extend to cover sales of EU imports and sales currently excluded under the £15 low value consignment relief.
See HMRC guidance here.
What does this mean?
What this means - If you have an online store
If you have an online store, such as Shopify, Wix or Squarespace, and you sell goods that are imported straight to consumers inside the UK, then you will need to start accounting for UK VAT on each sale.
As the end customer will only see the final selling price, this means that, for most businesses, 1/6th of their profit margin will be lost to VAT.
For example, if you currently sell something for £24, this will include 20% VAT (from the 1st January 2021). So, based on a final selling price, you will be charging £20 + £4 VAT (£24/6 = £4). If you want to maintain the current profit margin, you will need to increase your current selling prices by 20%.
You can register for UK VAT in advance. So, if you are a dropshipper making sales from outside of the EU into the UK, we recommend registering for VAT now, choosing 1st January 2021 as your effective registration date. This will ensure no interruption on your business.
Registering for VAT is a service that we provide, so if you need to register, get in touch today.
What this means - If you sell on an online marketplace (OMP)
If you sell goods via an OMP, such as Amazon, Esty, or Ebay, and your goods are being imported into the UK straight to consumers, then from 1st Jan 2021, the OMP facilitating the sale will be the responsible for collecting and charging VAT. This will be applied to the consumer at the time of the sale via the checkout by the marketplace. The seller (you) will instead make a zero-rated supply to the marketplace, including this amount as zero-rated on your UK VAT return.
Important note: If you sell from from UK to UK nothing changes and existing rules still apply. For example, if you sell on Amazon or Ebay and your goods are being shipped and sold from UK to UK, these changes will not affect your VAT calculation.
The Postponed Import VAT Scheme
Currently businesses pay import VAT when goods arrive in the country and then reclaim this VAT on their VAT return.
From the 1st January 2021 businesses importing goods into the UK will no longer be required to pay VAT upfront when goods arrive. Instead, they will be required to declare and recover the import VAT on the same VAT return (resulting in a NIL cash impact).
Postponed accounting can be used to account for import VAT where:
- Goods are imported for use in a business
- The business has a GB EORI number and this is used on the customs declaration (this is usually linked with your UK VAT number)
- The businesses VAT number is shown on the customs declaration
If you are not VAT-registered in the UK you will not be able to account for import VAT in this way. Instead you will need to pay import VAT at the time you import the goods.
Where postponed Import VAT accounting will not apply
Different rules apply to goods in consignments not exceeding £135. These are explained in the section regarding LVCR earlier in the article.
How to complete your VAT return under the Postponed Import VAT scheme
When goods are imported, it will be necessary to account for import VAT on the VAT return for the period where the goods were imported.
Information relating to imports will be made available through a new online account (information on this is not yet available - we will update this article as soon as it is). There will be an online monthly statement available to download and keep. This will be similar to the current C79 document that is sent out each month. It will show the total import VAT postponed for the previous month which you should include in your VAT Return.
The changes to how the VAT return should be completed are as follows:
- Box 1 Must include the VAT due in the period on imports accounted for through postponed VAT accounting.
- Box 4 Must include the VAT reclaimed in the period on imports accounted for through postponed VAT accounting.
- Box 7 Must include the total value of all imports of goods included on the online monthly statement, excluding any VAT.
For example, if you imported goods valued at £1000 you would need to include the following:
- Box 1: £200 (20% of £1000)
- Box 4: £200 (20% of £1000)
- Box 7: £1000
EU Distance Selling Thresholds no longer applicable to UK Sales
From 1st January 2021 EU Distance Selling Thresholds (DST) will no longer apply to UK to EU sales. For UK purposes this means that all sales from the UK will be treated as exports, so can be zero rated for UK VAT purposes.
From the EU perspective, these sales will be subject to import VAT on arrival. This may have the adverse affect on the consumer of having their goods held at customs until import VAT is paid. This is not good for ecommerce businesses as if customers have to pay more they will not be happy and are likely to complain/leave negative reviews.
There are VAT changes being planned by the EU that are due to be introduced on 1st July 2021. These will be discussed in a future article.
EC Sales Lists (ECSLs) scrapped for UK businesses
For the export of goods or the supply of services made to EU businesses on or after 1 January 2021, you will not need to submit EC Sales Lists (ECSLs). This will be the final ECSL submission that your business will need to make.
What is the deadline for the final ECSL submission?
You will have until 21 January 2021 to submit ECSLs for sales made before 1 January 2021.
How to register
We've pulled together a guide on how to register, including steps for doing it yourself, and links to our form if you would like us to handle this for you.