The VAT rules for all supplies of either goods or services that leave or arrive in the UK have always given rise to problems. Never more so than post-Brexit and now we have new VAT OSS Rules for EU sales on top of a significant number of other variables. This all leads to a lot of confusion about just how VAT works. Whether trade is on the basis of business to business (B2B) or business to consumer (B2C) and whether a supply is one of goods or services are key distinctions. So deciding which of these two categories apply should always be the starting point when trying to work out how to treat VAT on a particular sale. Read more about EU sales – New OSS VAT Rules below.
Broadly speaking Brexit has affected B2B trade a great deal less than B2C trade. This has been made much worse by new B2C rules being introduced from 01 July 2021.
It is a great pity that Covid caused the EU to not be able to introduce the new regime as planned from January 2021. Having to adapt twice to different VAT requirements has led many UK to EU B2C suppliers to simply turn off their EU sales until the new July rules are in place. It rather seems to be a case of the tail wagging the dog but an understandable and prudent choice given the expense involved in meeting the interim requirements.
Why have new VAT OSS rules for EU sales?
According to the EU in 2018 e-commerce is believed to have led to an EU VAT Gap of €140bn. By Covid generating a huge hike in e-commerce, in 2020 this VAT Gap is thought to have grown to €164bn. These alarming figures led to the introduction of the two new systems –
- The One-Stop Shop (OSS) for use for supplies of certain services and distance sales of goods, and
- The Import One-Stop Shop (IOSS) for goods imported into the EU by the UK supplier.
These measures are intended to ensure that VAT is always paid either where goods are consumed or where services are treated as being provided.
A good way to approach the question of ‘how does VAT apply?’ is to ask ‘where will the VAT be paid?’. In principle it needs to be paid once on every supply. Is that in the UK or in the EU? If in the EU, how will that be dealt with and who will pay it?
The VAT Gap largely comes from the old system allowing non-EU e-commerce suppliers to sell goods and services to consumers based in the EU and UK without them having to pay VAT. This then creates a trading distortion in favour of non-EU businesses adding further commercial pressure on to EU and UK suppliers. The new regime will remove both this problem and the need for multiple VAT registrations across the EU.
A key element of this move to close the VAT Gap is the removal of the £22 small consignment relief. What this does is stop the previous undervaluation of non-EU imports and ensure instead that VAT is brought to account on every supply to EU and UK consumers by every non-UK supplier.
From 01 July 2021 the new rules aim to ensure that VAT is always paid on every EU B2C supply irrespective of where the supplier belongs. They will affect both UK businesses selling B2C into the EU and also non-UK businesses selling B2C to UK consumers.
The IOSS allows the UK supplier who acts as the EU importer to submit one quarterly VAT return on which VAT is brought to account on all of the sales made across the EU. This return will allow for declarations at all of the different EU VAT rates (which currently range from 17-27%). Effectively the import VAT due will be paid over as sales VAT, which is then the VAT that has to be paid on the B2C supply.
The supplier will have to decide whether they have one EU selling price and therefore achieve different profit ratios according to where their customer belongs or have a much more complicated pricing system operating different selling prices for each EU country.
To take advantage of IOSS a UK business must first have an EU VAT registration. For ease of set-up and management, language plays a big part and therefore Ireland, the Netherlands or Belgium would seem like good choices.
The IOSS is an optional scheme but the alternative of having to register for VAT in each country where sales are being made is likely to be costly. While an actual registration allows for VAT recovery on local costs being incurred, in many cases a fiscal representative is required which increases the operating cost quite significantly.
The OSS or Mini One-Stop Shop (MOSS) has been in place since 2015 but from July 2021 can also be used to look after VAT on distance sales. For businesses already registered under MOSS, Brexit means they must change on to the Non-Union version of the OSS.
Like the IOSS, the OSS requires an EU VAT registration via which it can then register for OSS and also then benefit from a one return method of accounting for VAT at different rates on all EU sales.
The Non-Union OSS will be available to UK businesses and used to account for the VAT due on EU B2C supplies of certain services. This includes electronic services e.g. telecoms, broadcasting, other digital services and those services where the place of supply is in the EU. This latter category includes land related services, transport and where the supply is treated as taking place according to where it is physically performed or treated as being used and enjoyed in a particular EU country.
Once VAT registered in the EU a UK supplier can use the OSS to handles VAT due on distance sales into the EU using the Union Scheme. Confusingly it is not possible for UK businesses to declare distance sales of goods in the Non-Union OSS scheme. Nor can they declare VAT due on services in the Union scheme. It follows that in some cases a UK supplier may need to register in both schemes, one for services and one for goods.
While the new rules are described as simplifications, they are still fairly complex to grasp. This is made more difficult by different treatment being applied where a UK business already has an EU presence or one or more EU VAT registrations. For brevity the rules in these latter situations are not covered here. Instead the focus is to look at the straightforward situation of a UK business selling either goods or services B2C into Europe without already having an EU registration.
Selling goods B2C into the EU
Where each sale is <€150; the goods are shipped from the UK on DDP terms (so the supplier is the importer) and not sold via an Online Marketplace (‘OMP’) the supplier can deal with the VAT due using the new IOSS. To qualify the supplier must first have an EU VAT registration via which it can then register for IOSS.
Where each sale is >€150 and the goods are shipped from the UK on DDP terms (so the supplier is the importer) the supplier must register for VAT in the consumer’s country and charge VAT in the normal way. Having one EU registration should then entitle the UK supplier to take advantage of the EU distance selling rules which might help shelter low levels of trade from triggering further EU VAT registrations being required.
Where goods are shipped from the UK and the customer is the importer and pays the import VAT and duty due, the UK supplier can zero-rate the UK sale and need not register or charge EU VAT.
Selling services B2C into the EU
Where the place of supply is the customer’s own EU country being electronic services, land related services, transport and ‘performance’ services, the UK supplier needs to register for VAT somewhere (e.g. Ireland etc) and then register for Non-Union OSS. VAT then falls due at the rate applicable in the customer’s country.
Where the services are other professional, consulting, etc services then the supply is UK zero-rated and the supplier need not register for or charge EU VAT.
Sales of goods via an Online Marketplace (OMP)
Where each sale is <€150 and the goods are sold via an OMP, it will be the OMP who is liable to account for VAT on the supply.
Where each sale is >€150 and irrespective of whether the goods are sold via an OMP, if the supplier is acting as the importer (per the Inco terms) then a VAT registration will be required and the supplier obliged to charge VAT on the onward sale.
Mirror image provisions to those imposed on UK businesses selling B2C into the EU are also being imposed in the UK for non-UK suppliers. The UK has introduced a threshold of <£135 for each sale so that the supplier either has to account for VAT under its own VAT registration or the same amount of VAT has to be brought to account by the OMP.
As with UK B2C supplies into the EU, where a consignment is >£135 and the supplier is acting as the importer (which is usually dictated by the Inco terms) then a UK VAT registration will be required. Given that there is a zero VAT registration threshold operating for non-UK businesses, any imports followed by an onward sale will create a liability to register and charge UK VAT.