EU VAT – What’s changing and why it’s important
James Marley is our UK-based cross-border expert whose specialty is taking complex, mundane topics like EU VAT and decoding them into simplified, humorous guides.
On July 1, 2021, the European Union (EU) will reform its Value-Added Tax (VAT) rules. If you have an ecommerce business that ships orders to the EU then these new rules may affect you. Understanding these new rules will make you both a magnetic dinner party guest, and:
- Reduce cost – carrier fees may be a thing of the past.
- Reduce risk – prepaid tax means fewer abandoned packages.
- Improve cash flow – pre-collecting VAT means better cash flow.
- Improve user experience (UX) → greater Customer Lifetime Value (LTV) → greater Conversion Rate (CR) → increased Return on Advertising Spend (ROAS) → more money to scale your business (MTSYB) → The Fancy Kind of Dinner Party (TFKODP)
This is a Barney-style guide created to decode the EU VAT changes because there’s a load of jargon-drenched, sales-biased, bogeyed-boring online content about what the new VAT rules are, but very little simplified content on the effects of this scheme.
While this guide is about VAT, it’s important to note that duty is only owed on goods over €150 into the EU. Understanding this helps explain the logic behind some of the EU VAT-related advice below. This guide will discuss the new EU VAT scheme, what it entails, and how it will affect your business.
What are the new EU VAT changes for ecommerce businesses?
It’s worth mentioning the official names of these changes so that you have a point of reference for association with other, less awesome, articles on EU VAT. Don’t worry too much about the official names for the time being; they’ll be explained more in detail later in this guide. You can probably imagine the level of creativity in a VAT authority’s branding department, so prepare yourself.
- Introduction of the Import One-Stop-Shop (IOSS) VAT Return for goods under €150. Snappy eh? (See our EU VAT guide for a deeper dive into the VAT collection methods available as of July 1, 2021.)
- The END of the EU’s €22 VAT ‘de minimis‘. WHAT? Latin? Why?
Now that you’re aware that there are changes coming, let’s do a quick summary of what the rules have changed from. This provides context for the new rules which will help with understanding.
How is EU VAT handled now (before July 1, 2021)?
For non-EU businesses shipping into the EU, orders less than or equal to €22 are exempt from VAT. Also, VAT is collected by the carrier when the goods enter the EU (Supply VAT). This is where billing terms/Incoterms (ew jargon) become really important as they determine who bears the direct cost. Here’s a reminder of what those incoterms are plus some BONUS MATERIAL on how silly the logistics industry can be with jargon and acronyms.
The EU VAT changes and effects – Explained
1. Import One-Stop-Shop (IOSS)
IOSS is the VAT collection method that requires the online retailer to collect VAT at the time of the sale as well as register for an EU VAT IOSS number and remit the VAT monthly to the EU country of registration. IOSS is not required but is the recommended option as its aim is to allow customs to clear and release the package as quickly as possible for a timely delivery.
How will the administrative costs of IOSS affect the profitability of my international operation?
For non-EU online retailers, IOSS registration will be more expensive than your European competitor’s VAT operation because you’ll now have to pay a price for in-country (European) fiscal representation. When the EU said they wanted to “level the playing field,” they took it to the extreme because now it is not really level. This change sways in the favor of EU businesses; not only do non-EU retailers have to pay import VAT for shipments into the EU, but they also have to pay for fiscal representation
Let’s assume that you sell an identical product to your European competitor. Previously you could compete on price because you didn’t have to pay VAT. That VAT-less margin could be used to offset the additional cost of international shipping. This is a good time for me to say, don’t bother trying to push the carriers for a decrease in rates because their costs just went up!
2. The €22 VAT de minimis is no longer in effect starting July 1, 2021
First off, what does this mean? No de minimis means no VAT exemption; all orders entering the EU, regardless of their value, will incur VAT upon import.
Businesses who have always sold high-value products into the EU might be thinking this change has no effect on their business because they never reaped the benefits of the de minimis. However, this is not the case.
How will the end of the €22 de minimis affect businesses shipping high-value goods?!
- At the start of the year, there was an exponential increase in customs failures at the EU border caused by bad customs paperwork – the exponent was Brexit.
- Despite years to prepare, these customs failures caused ALL carriers to fall over due to backlog.
- The customs paperwork didn’t suddenly get better and the carriers don’t now have a magic solution.
- The EU is about to both increase the number of low-value clearances now required in the EU AND increase their scrutiny on product values on paperwork.
- Adding a load of weight to a boat that’s barely floating doesn’t make it sail faster. Quite the opposite actually.
If you take a more holistic (never used this word before. Boom. Woke.) view to ecommerce, then the end of the €22 VAT de minimis means you’re now in the same boat as your European competitors.
So what do you need to do? Time to get your house in order! Shipments with good paperwork and that are easy to clear will be the priority. If you send shipments into the EU and customs needs to contact the consumer to collect revenue then you’re about to face problems like extended transit times, increased losses due to things getting lost in bond locations, abandoned/returned packages, and unhappy customers, etc.
So how should high-value sellers react to the new EU VAT scheme?
- Ensure you are collecting the right amount of duty, VAT, AND CLEARANCE FEES in the checkout. Don’t just settle for duties and taxes – you need the LANDED COST!
- Send the shipment DDP (duties and taxes prepaid).
- Make sure the information on BOTH the shipping label and commercial invoice are perfect and meet the requirements for the country to which they are being shipped.
Or, just call Zonos and we’ll handle all of that for you. We provide you with the tools (and support) to be able to do it yourself. It’s up to you. We’re all about free will and human empowerment at Zonos.
Is IOSS my only option for VAT collection after July 1, 2021, or are there alternatives?
There appear to be three distinct, non-IOSS alternatives of approaching this spectacularly exciting topic:
Alternative 1: Whatevs, send the shipment DAP/DDU (without prepayment of duties and taxes). The consumer can sort it out with the carrier upon delivery.
Alternative 2: Send the shipment DTP/DDP (duties and taxes prepaid) and opt to charge the duties back to yourself but charge the consumer the full landed cost at checkout.
Alternative 3: Send the shipment DTP/DDP and hope that all the costs will be covered by your product margins – essentially you eat the cost of VAT.
In truth, there isn’t a single solution that is right. It’s difficult to think of a scenario in which the first option could be deemed an intelligent approach. You might get a sale; however, chances are strong that the customer will never buy from you again after being shocked by VAT charges when they get their package… and there’s just no need for this approach. I do like a good nautical analogy, so this approach is akin to drilling a hole in your boat because you’re thirsty and want a drink.
The second approach of presenting the full landed cost at checkout is smart but a full landed cost can make a product look expensive! However, this is the most honest approach and is the most likely to have a positive result. It’s great that you’re being honest about those charges and making things easy for the consumer but are you going to lose them when they see that they may be paying 40% more on the listed price?
It’s also worth pointing out that there are many “solutions” out there that will allow you to offer duties and taxes in the checkout; however, they don’t factor in carrier fees which can (on low-value items) make up the majority of the cost!
The third approach is the one that many large UK and EU merchants took with Brexit: sending shipment DDU and absorbing the VAT. They wanted to minimise disruption to the customer and so internalised it. It was a smart approach and has meant that they haven’t lost a load of customers since the beginning of the year.
Although each of these alternatives has its pros and cons, IOSS presents the best customer experience and other benefits such as better cash flow, avoidance of carrier surcharge fees, and expedited clearance.