Big changes are coming to the UK's VAT system from 1 January 2021. From this date, online sellers and those who sell through online marketplaces may have to change the way they do business.
The main VAT changes eCommerce businesses will need to prepare for involve the following rules:
- 1. The Low-Value Consignment Relief
- 2. The postponed import VAT scheme
- 3. Distance Selling Thresholds
- 4. VAT MOSS Scheme Extension
- 5. EC Sales Lists
Why is VAT changing?
The primary reason for these changes is Brexit, as 1 January 2021 is the day the UK officially leaves the EU. However, not all of these changes are a direct result of Brexit as some were planned by the EU before the vote to leave.
When are the VAT changes coming into effect
The UK and EU originally planned to introduce new eCommerce VAT changes together on 1 January 2021. However, since COVID-19, the EU has postponed changes to VAT until 1 July 2021 while the UK changes will come into effect on 1 January 2021.
This means that some of the following changes will only be effective from July instead. These changes could affect any VAT-registered eCommerce business so it's important to be fully prepared.
Changes coming to eCommerce VAT in 2021
1. Low-Value Consignment Relief (LVCR) scrapped
One of the main changes coming up is the scrapping of the £15 Low-Value Consignment Relief. Originally, the LVCR rules meant that imported goods valued at £15 or less were not subject to UK Import VAT and Customs Duty. Goods valued over £15 but no more than £135 would have only Import VAT applied, but not Customs Duty.
However, HMRC has announced that the LVCR will be scrapped and all imported goods will be subject to UK VAT. This could be 0%, 5% or 20%, depending on the goods imported.
Goods that are valued at less than £135 will also be liable for domestic VAT rather than Import VAT. This means that VAT will be collected from the point of sale rather than the point of importation.
How this change affects online sellers
Those selling through an online store directly to consumers in the UK will need to account for UK VAT on each sale. This means charging the correct VAT rate and potentially increasing prices to cover it.
If the customer receiving the goods is not VAT-registered, the seller or online marketplace must register for and charge UK VAT. However, if the customer is VAT-registered, the seller must get the customer's VAT registration number. The customer can then apply the reverse charge for VAT on behalf of the seller.
For those who sell goods through online marketplaces (OMPs) such as Amazon or eBay, the OMP will be responsible for collecting VAT. This charge is applied to the customer at the time of the sale.
If your goods are shipped and sold within the UK without leaving the country, the above changes will not affect your VAT.
2. Postponed import VAT scheme
At the moment, businesses pay Import VAT when goods arrive in the country and then apply to reclaim it on their VAT return.
From January onwards, businesses importing goods into the UK will no longer have to pay VAT upfront when the goods arrive. What will happen instead is they will need to declare and recover the Import VAT on their VAT return.
However, if you are not VAT-registered in the UK, you will not have to account for Import VAT like this and will instead pay at the point you import the goods.
How to file VAT returns with the Postponed Import VAT scheme
HMRC's official guidance says that you must account for postponed Import VAT for the accounting period when you imported the goods. On your VAT return, you must include the following information in the boxes mentioned.
Box 1: You will need to include the VAT due in this period on any imports affected by the postponed VAT accounting scheme. This information can be accessed from your online monthly statement or through your own estimates.
Box 4: In this box, you will need to include any VAT reclaimed on imports accounted for through postponed VAT accounting. This can be taken from your statement or your own estimates.
Box 7: Here you will need to include the total value of all imports in this period, without including any VAT.
3. Distance Selling Thresholds (DSTs) no longer apply to UK sales
The rules surrounding DSTs will no longer apply to UK-to-EU sales. This means that all sales from the UK will be treated as exports. Those sales to the EU will be subject to Import VAT on arrival.
This could affect customers receiving the goods as the items will be held at customers until Import VAT is paid. This spells bad news for UK eCommerce businesses selling to the EU. If you raise prices to cover Import VAT and customers have to pay more, they may stop being customers. This change for the EU VAT laws will come into effect on 1 July 2021.
4. Changes to the VAT MOSS scheme
For those who use the VAT MOSS scheme to supply digital services to the EU, a new change is coming your way.
VAT MOSS was designed for UK sellers to make VAT simpler. This meant that instead of registering for VAT in every EU country, sellers can just pay the VAT to HMRC.
New rules state that the VAT MOSS scheme will be expanded to cover not just digital products but physical ones as well.
This means that a UK business will be able to make physical goods sales to the EU without needing to register in each separate EU country. This change will come into effect from 1 July 2021 rather than January.
5. EC Sales Lists (ECSLs) scrapped for UK businesses
Another change coming to eCommerce VAT is the EC Sales Lists are to be scrapped. This means that exporting goods to the EU after January will no longer require EC Sales Lists to be submitted.
The deadline for the final ECSL submission must be made before 21 January 2021 for any sales made before 1 January 2021.
With such big changes coming to eCommerce VAT in 2021, one of the best things you can do is speak with your accountant or tax advisor. They will be best-placed to advise you of the upcoming changes and help you prepare.
Get expert VAT advice
If you think your company may be affected by the coming VAT changes, BrooksCity can help. As Chartered Accountants, we have over a decade of experience helping eCommerce businesses in London and across the UK deal with the complexities of the VAT system. If you'd like to discuss your situation contact us for a free consultation by requesting a quote here.
Disclaimer: This article is provided for information purposes only and may not be up to date beyond the date of publication as new tax updates are made available. The reader should seek expert advice before making decisions regarding the situation. We recommend you contact BrooksCity for further assistance.
