Given that we have all seen pretty much everything change almost overnight, it is hardly surprising that everyone seems to have forgotten about Brexit. However, this is still something that will affect lots of businesses after December 2020 including, in particular, mail order and online traders. Anyone selling B2C into the EU really should start making a plan now. This article outlines how they might deal with VAT and protect their B2C EU sales going forward.
Currently, UK businesses can sell B2C into the EU and carry on charging UK VAT until they hit the distance selling limit in their customer’s EU state. The limit is either £35k or €100k, according to the choice made by each member state. For example, the distance selling limit in France is €35k, but in Germany it is €100k. Applied on a calendar-year basis the distance selling limits have been a convenient method of handling VAT on EU B2C sales. However (and that really is a big however) the distance selling provisions only apply to EU VAT registered businesses. Anyone else does not qualify and that will soon include the UK, so from January 2021 online traders face having to set up a VAT registration anywhere in the EU where they have a B2C customer.
Put simply, after December 2020 UP mail order businesses need a new VAT solution. They simply cannot carry on as at present.
There are a number of possible solutions to the problem of losing the right to use the EU distance selling provisions, which fall into three broad categories:
- UKCo sells free of UK VAT and the EU B2C customer pays the import VAT;
- UKCo sells free of UK VAT and the UK business pays the EU import VAT (note – there is a big problem here, see below) or
- UKCo sells free of UK VAT to an in-house EU Hub VAT registration (a very clever solution).
Successful business decisions are all about balancing the pros and cons and these differ across each of these three solutions. So taking each one in turn:
- The EU B2C customer pays the import VAT is seen by many as the least attractive commercial option. As well as paying for their order with UKCo the customer will also need to effectively act as the importer; pay local import VAT; possibly also import duty plus any local handling charge when their parcel is delivered. Although the UKCo will not need to charge UK VAT or register for VAT anywhere else, that is at the cost of making it difficult and expensive for the customer, which could well cause them to take their business elsewhere.
- UKCo pays the import VAT instead of the customer is being assumed by many to be a viable plan. However, it creates a big problem under the place of supply rules and has a very expensive VAT impact. By UKCo acting as the importer and paying local import VAT (and possibly duty) the UKCo will be treated as making a supply in teh same EU state as each customer. Importantly, foreign businesses do not have any VAT registration limit available to them in any of the EU states. This means that a single sale of any value is treated as being made in the EU state either where the import takes place or where the customer belongs so that the UKCo has no choice but to register for local VAT. Even with low values in each EU state, if the trade is spread across all or a lot of the EU it is easy to see how a UK company could need up to 26 VAT registrations. To make this situation worse, Fiscal Representatives are quite commonly required for each EU VAT registration, so the associated fees incurred under this model could be significant and even wipe-out profits on EU sales.
- UKCo sells to an in-house EU Hub VAT registration would overcome the main VAT problems on B2C sales as outlined above. It is a rather grown-up solution but one that would be remarkably easy to implement, essentially:
i) UKCo sets up a Dutch VAT registration, which then gives the company entitlement to use the distance selling provisions across all EU states;
ii) UKCo would take online B2C orders from customers as at present, package the goods here addressed to the individual customers but instead of shipping firect, they would be sent as a larger consignment shipment to an agent in the Netherlands. The UK sale would be treated as a zero-rated export to their own Dutch VAT registration;
iii) B2B sales can continue as at present but could also follow the hub route if advantageous (e.g. see below re France);
iv) The agent – which for example in the Netherlands might be UPS – clears the consignment with the local Customs authority showing the UKCo both as the importer and paying any import VAT due;
v) The agent opens the consignment box, despatches parcels to the individual customers who receive them ‘VAT paid’ as at present, and
vi) UKCo reclaims import VAT on its Dutch VAT return and pays VAT on all of its EU B2C sales. These VAT declarations would be either by declaring Dutch VAT up to each distance selling Limit or, if trade exceeds the limit, under Distance Selling registrations set up for other EU countries.
The example shows teh VAT Hub being in the Netherlands, which is attractive because English is widely spoken but may involve setting up a bank guarantee. Other main options include France or Belgium. The former is attractive if a lot of B2C customers are based in France as FedEx offer the service outlined above and operate out of Charles De Gaulle airport. This could also be a good choice if UKCo makes B2B supplied in France as there is a VAT simplification which improves cashflow by not having to pay either import VAT or VAT on B2B French sales. careful consideration of the options would be required before making any commitments.
The good news is that having, say a Dutch registration means that UKCo remains eligible for the existing distance selling provisions. The bad news is that in some cases the post-Brexit shift to the UK becoming non-EU will mean that some EU countries e.g. Austria, France and Spain require a Fiscal Representative. This will increase costs per each distance selling registration but at least B2C trade can continue without making the transaction more difficult and expensive for EU B2C customers.