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June 11, 2021 / 0 min read - Last updated: November 23, 2022
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:
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.
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.
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.
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.
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?!
If you take a more holistic (never used this word before. Boom. Woke.) view of 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 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, unhappy customers, etc.
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.
There appear to be three distinct, non-IOSS alternatives for 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 minimize disruption to the customer and so internalized 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.
James grew up in the UK and ex-pat communities of the Middle East, Africa and Russia. Following University in the UK, he helped launch a start-up based in Venice Beach, California. After a decade of continuous success and experience, including working in South America and the Far East, James took a chance to establish another start-up based in Teton Valley, Idaho. Thankfully, it failed and went on to provide a definitive period of personal development resulting in a more analytic and patient approach to business. Returning to the United Kingdom, James spent 5 years working in International Development with DHL Express. James now supports Zonos with Global Partnerships. James is a firm believer that hard work, humour and honesty are the fundamental tenets of success.
Cross Border, Duties and Taxes, Global Trade Compliance, Industry,