If your business sells goods online to customers based in the EU, there are big changes to VAT which you need to be aware of. These changes will affect businesses that are located in- and outside an EU country. The coming changes focus on cross-border e-commerce B2C transactions, such as any online sales of clothes, jewellery and technological products to private individuals. The new rules are aimed at lessening administrative burdens for businesses and combating VAT fraud.
Background
Before looking further into the coming VAT changes, find below a summary of the following two elements of the EU’s existing VAT system, for context:
Distance sales for EU-based businesses
Businesses selling goods to consumers in other countries most likely will face an obligation to charge and collect local consumption taxes. The EU has created a special regime, known as Distance Selling, to simplify the administration and burden as far as possible to encourage free trade in the zone. The basic rules are as follows:
Retailers may initially sell to private individuals in other EU states under their local VAT number at their home VAT rate. For example, a UK retailer sells bracelets at the UK VAT rate of 20% to German customers instead of German VAT rate of 19%.
Once they pass the respective country’s distance selling annual threshold, they must register as a non-resident VAT trader in the country. Continuing the example, if the UK retailer sold more than €100,000 worth of goods in Germany they would have to register for German VAT and charge 19% VAT on all B2C sales in Germany.
The EU’s mini One Stop Shop (MOSS)
MOSS currently covers only e-services that are provided from EU or non-EU suppliers to end-customers in the EU. It is important to note that today MOSS does not cover goods or supplies of any services to business customers.
MOSS allows companies to pay the VAT due for all their e-services sales (as described above) in the EU by paying only one member state and reporting on only one VAT return. The member state of registration then distributes the VAT between the respective member states where the e-services have been purchased and consumed.
The coming VAT changes: Online distance sales of intra-EU goods
The new measures were announced
in November 2019 and will take effect from January 2021. They are part of the
biggest changes to the EU’s value-added tax system in over 20 years.
Under the coming distance sales rules for
intra-EU goods, there will be a new One Stop Shop (OSS) online portal that will
combine and extend the current MOSS system and distance sales rules explained
above. Under the new, simplified rules, businesses will no longer need to
register in all member states where they exceed the VAT threshold. Hence they
will no longer need to submit local VAT returns in each member state where its
customers are located. The online portal will be available in the language of
your EU member state and your state will be responsible to distribute the VAT
collected from other states. This will also allow EU traders to recover through
the OSS scheme any import VAT incurred in other member states.
Important to note is that the distance selling threshold will be the same, EUR
10,000, across all countries. Continuing the example of the UK bracelet seller
above, he would now have to account for German VAT after EUR 10,000 rather than
EUR 100,000 of sales in Germany. However he would not have to register for
German VAT anymore as he would be filing and paying VAT through the UK portal
of the OSS scheme.
The effect of Brexit
The UK has left the EU on 31 January 2020. From 1 February the UK will no longer be a member of the EU, and it will enter an implementation period that lasts until 31 December 2020. During this time there will be no changes to the terms for trading with the EU or the rest of the world, unless the rules change for the whole of the EU. This means EU rules for customs and VAT such as the distance selling and MOSS scheme will continue to apply to the movement of goods and trade for this limited time.
During the 11 month transition period the EU and UK will negotiate the extent to which the UK will leave the EU’s customs territory which will impact the position of the UK in the newly introduced VAT scheme mentioned above.
