On 1 July 2021 the VAT rules for trading in the EU changed significantly. Suppliers, both EU and non-EU, are now required to register for VAT in every EU member state to which they deliver goods and precise steps should be actively taken to avoid this.
There are solutions. They range from requiring very little action, to setting up one or two registrations in suitable EU member states, to applying multiple solutions in support of a thriving EU market. This article will explore the rule changes, their implications and highlight different solutions.
The rule changes affect more than just “One Stop Shops”, or just “e-commerce”, or just “goods imported into the EU”, or even just “goods”. The starting-point for suppliers with a customer in the EU is to understand their supply chains and develop a clear understanding of the new VAT rules’ impact. Effective solutions can then be developed and implemented.
What are the changes?
The core change is that supplies of goods which were subject to VAT in the supplier’s country will now be subject to VAT in the country of arrival (Article 33, EC VAT Directive 2006/112/EC “PVD”). Additional rules remove the automatic relief for import VAT on low value consignments and create simplifications known as “one stop shops” (Articles 358 onwards, PVD).
These changes affect supplies of all goods and of many services to customers within the EU. For goods, this will include e-commerce, EU imports and drop-shipping. For services, the new rules should be considered where an EU place of supply is required, particularly the following services (Articles 46 to 59b, PVD).
- Intermediary services, where for relevant underlying transactions
- Services related to land and property
- Transport services
- Supplies of cultural, artistic, sporting, scientific, educational entertainment and similar services, ancillary transport services and valuations of and work on movable property
- Restaurant and catering services
- Hiring of means of transport
- Electronic services, telecommunications and broadcasting
- Services subject to the use and enjoyment override (at the discretion of each EU member state individually)
The changes can be summarised as follows:
- Supplies of goods transported from one EU member state to another are now subject to VAT in the EU member state of destination (Article 33, PVD). This is a change from the rules which previously allowed VAT to be charged in the EU member state of departure, known as “distance selling” (a term whose meaning has changed from 1 July 2021). Without further steps, this change will require suppliers to register for VAT in every EU member state to which goods are delivered.
- For supplies of goods via an independent electronic interface (ie online marketplaces such as Amazon, eBay, Etsy, etc), accounting for EU VAT liabilities is now the responsibility of the online marketplace rather than the supplier (Articles 14a, 14b and 369a onwards, PVD). The circumstances are limited, but it is a great advantage for many smaller suppliers, although it creates a tricky distinction for other businesses and a challenge for the online marketplaces themselves.
- Simplifications have also been created. There are three One Stop Shops, each with their own limitations on use. It might be that none, one or a combination might be suitable for a supplier:
a) Non-union One Stop Shop (Articles 358a onwards, PVD)
This might sound like a solution for non-EU suppliers now the UK has left the EU, but it applies only to services.
b) Import One Stop Shop (Articles 369l onwards, PVD
This is useful for goods imported into the EU, but there are limitations such as a maximum of Euro 150 for consignments.
C) Union One Stop Shop (Articles 369a onwards, PVD
This does not sound relevant to non-EU suppliers and it is only valid for supplies of goods between EU member states, but it can be useful for non-EU suppliers within the right solution.
While the new rules would require a supplier to register for VAT in all 27 EU member states at great expense, solutions do exist, although most require at least one additional registration within the EU.
What are the solutions?
After assessing supply chains in light of the new VAT rules, appropriate solutions can be determined. If just six factors are considered to determine the appropriate solution, there would be 720 different possible supply chains; and there are more than six factors. It is beyond the scope of this article to cover them all, but several examples are considered below.
Example 1: customer responsible
Businesses and their advisers should consider the simpler, more affordable solutions first. This would be to set aside the new rules and make EU customers responsible for the VAT on imports into the EU.
If this option can be pursued, it should be. However, risks have become apparent in recent months. Some EU business customers (B2B) have found difficulties in acting as EU importer and refuse to take on this role, but it should be a starting-point when assessing solutions. Non-business EU customers (B2C) can be required to pay additional costs (EU import VAT, amongst others) and they might also experience delays at EU Customs before receiving their goods. Reputational damage can be significant, but for those suppliers with only a few customers in the EU member state and no growth ambitions, there is perhaps little motivation to pay for any other solution.
If this approach is a preferred part of a supplier’s solution, there are ways to ease some of these challenges. However, there are also some parties who are not comfortable with their role within this solution, including the transporters themselves. Planning and discussion with all parties is therefore important.
Example 2: internet sales I
As online sales continue to increase, sellers will welcome the fact that supplies of goods via an independent online marketplace (known as electronic interfaces in EU legislation) have become the VAT responsibility of the online marketplace itself. This includes sales via Amazon, eBay, Etsy and so on.
This is an excellent solution for non-EU suppliers. Not only can they zero-rate exports of their goods, recovering VAT on attributable purchases, but they also have no VAT requirements to meet on their sales.
There are limits, however. Consignments of goods entering the EU are limited to Euro 150; and sales will still have EU VAT liabilities and other costs deducted before the balance is paid to the supplier. The impact of this EU VAT being deducted from sales becomes clear when it is understood that VAT standard rates vary between 17% and 27% in the EU, which can make the difference between a profitable and a loss-making market.
There are other issues too. As they start to become successful, sellers should plan how to account for EU VAT on their first order in excess of Euro 150. They should also be planning for their first sales via their own website, as there is then no online marketplace to take responsibility for EU VAT.
Businesses rarely sell only via an online marketplace in consignments of Euro 150 or less and alternative solutions should usually be explored at an early stage.
Example 3: internet sales II (Import OSS)
Many non-EU suppliers will have supply chains which cannot benefit from the solution in example 2. The supplier will instead be responsible for the EU VAT on their sales into the EU. This will include paying EU import VAT in each member state where the goods arrive and paying VAT on each sale of goods there.
Given the nature of the internet, this often results in a few sales in many EU member states, each with an expensive requirement to register and account for VAT. For smaller consignments, there is the Import One Stop Shop. This solution removes EU import VAT and allows the VAT on sales (payable in every EU member state of delivery) to be accounted for in just one EU member state, which will be the supplier’s choice.
Here too there are drawbacks, the chief of which is the limit to consignments valued at Euro 150 or less. Sales above this limit risk triggering additional VAT registration requirements for the supplier. The advantage for those making small supplies is that the supplier only registers in one EU member state and can choose where to register, whether for reasons of language, geographic convenience, ease of communication with the tax authorities, or any other reason.
Example 4: drop-shipping (Union OSS)
Drop-shipping is where a supplier purchases goods from one country and arranges for them to be delivered in another. Popular with online suppliers, it risks incurring a liability to register for VAT in every EU member state where the goods are delivered. It is a risk that can be managed using the Union One Stop Shop, but action is required to avoid unexpected liabilities arising.
Example 5: adjusted supply chain
An alternative to the Import One Stop Shop, which is likely to be a limited solution for non-EU suppliers, is for the supplier to declare the goods for import in a single EU member state while the goods are transported on to their destination. This will require the supplier to register for VAT in that one member state of import and for a Union One Stop Shop registration, but then the VAT requirements can be fulfilled completely.
The drawback is that the goods must physically enter the EU member state of VAT registration before they can be declared for import there, limiting transport routes. Discussions are therefore required with the transporters, to ensure the chosen route can be fulfilled and to determine non-VAT factors such as additional charges or time delays. However, this solution is scalable and flexible.
Example 6: real world - goods
In practice, businesses grow unsteadily, with multiple different outlets and supply chains. Different solutions will be appropriate at different stages of a business’ growth, perhaps beginning with passing VAT responsibilities for small initial sales into the EU onto customers and online marketplaces. Sales should be monitored, however, and when it is predicted that consignments will exceed Euro 150 or that customer dissatisfaction will become too great, wider solutions will be explored. An Import One Stop Shop might seem attractive if demand requires that goods are not delayed when delivered to EU customers, but the adjusted supply chain (example 5) is a complete solution, encompassing B2B and B2C supplies (whether imported into the EU, or drop-shipped within the EU, or sales using the margin scheme), while leaving the supplier in control of imports and avoiding customer dissatisfaction.
Difficulties for the supplier are not eliminated by the adjusted supply chain: there are additional expenses, lead times to have registrations in place, and communication with customers, transporters and specialists. Suppliers will also be considering how to show prices inclusive of EU VAT and devising systems to distinguish between supplies where they are responsible for VAT and where they are not.
Example 7: real world - services
Suppliers of services benefit from the EU rule changes. At the start of 2021, Brexit enabled many supplies to EU customers to be zero-rated where they were subject to UK VAT previously. Some services however were always subject to VAT in an EU member state, requiring the supplier to register there for VAT. One example is electronic services, which are subject to VAT where the non-business customer is located. Another example is an architect’s services, which are subject to VAT where the property is located.
Since 1 July 2021, such suppliers have been able to register for the Non-union One Stop Shop in an EU member state of their choice, enabling them to declare and pay different EU VAT liabilities in a single return.
Example 8: online marketplaces
The parties which find these changes most difficult are the online marketplaces themselves. They are responsible for all supplies of goods into the EU in consignments of Euro 150 or less and supplies of goods within the EU, no matter how small the online marketplace might be. They will incur VAT liabilities across the EU and should consider a combination of solutions. They have also been responsible for additional UK VAT requirements on supplies of goods moving from the EU into GB (sales involving Northern Ireland requires separate consideration as it is part of the EU for VAT purposes rather than the UK).
The main concern for an online marketplace is that the suppliers continue to trade on their platform. The online marketplaces often choose to help suppliers work through the new barriers to selling to EU customers. The resulting burden on online marketplaces is significant and many are considering how they can address these VAT issues on behalf of the suppliers.
The new rule changes make it easier for small suppliers to trade with EU customers via online marketplaces. For other suppliers, the changes only make it more challenging.
The risk is that the supplier will be required to register for VAT in every EU member state where goods arrive. Precise steps are actively required to avoid the worst of these new burdens.
Which solution is appropriate for a supplier will be determined by the supplier’s supply chains and a balance of cost versus benefit. Advice should be sought and steps taken as early as possible. Discussions with specialists, customers and transporters are important to ensure all parties are comfortable with the supply chain and their role, addressing any objections in advance. The written terms of trade should then be clearly stated and agreed.
Solutions do exist: start early, take advice and communicate.