Recently the U.K. and the E.U. made some sweeping changes to their tax system that directly impacted ecommerce businesses. Specifically, there were big changes to how VAT (value-added tax) is calculated, and EcommOps has gotten a lot of questions about how these VAT changes will affect China fulfillment.
Below, we’ll give a brief background to what exactly VAT is, what the recent VAT changes were, and how those changes have impacted direct-to-consumer (DTC) fulfillment.
Before we get started, we have a disclaimer about the information you’re going to read:
The information contained in this article regarding the new VAT developments in the E.U. and the U.K. is for general guidance only. The application and impact of law can vary widely based on the specific facts involved. The information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal, or other competent advisors. Before making any decision or taking any action, you should consult a professional, like those at GetFreeTax.
What Is VAT?
VAT is short for “value added tax,” which is a specific kind of tax that is common in European countries. VAT is applied to every step of the supply chain of a product, with the end consumer paying the final VAT when they purchase a product.
Below, the graphic describes when VAT is applied. Producers of raw materials charge a VAT when selling to manufacturers, who charge a VAT when selling to distributors, who then charge a VAT to retailers, who finally charge a VAT to consumers.
To simplify this a bit, let’s simplify the chain to three parties (a supplier, a retailer, and the consumer). Let’s say a supplier sells $100 of tea to a retailer, and there’s a 20% VAT. The retailer pays the supplier $120, which is the cost of the tea with tax added on. The supplier takes the $20 of VAT collected, and pays it to the government.
$100 x 20% VAT = $120 total
Let’s say the retailer takes that tea, marks it up to $200, and sells it to consumers. The price would be $240 (since the 20% VAT is added). The consumer pays $240, and the retailer pays the government $40 for the VAT.
$200 x 20% VAT = $240 total
The retailer already paid $20 in VAT to the supplier. That $20 and the $40 they collected from the sale is $60, but they should only have to pay $40 based on the value of the tea. The retailer can reclaim the overpaid portion ($20), so they only end up paying a total of $40.
$60 total VAT – $20 VAT paid to supplier = $40 VAT retailer is responsible for
In a more complicated supply chain, there are two parties that don’t get to reclaim any VAT. The raw material producers (because they didn’t buy anything to begin with, so they didn’t pay a VAT) and the end-consumer (since they won’t sell to another party in the supply chain.)
What are the E.U. VAT Changes?
We’ve got a basic understanding of what VAT is, so now we can take a closer look at what the VAT changes were. First, let’s look at the E.U. VAT changes, which were first applied July 1st, 2021.
Removal of distance selling threshold for VAT and introduction of one stop shop (OSS)
Before the changes, if you sold below a certain threshold in a specific E.U. country, you didn’t have to worry about VAT at all. This only applied to ecommerce businesses located in the E.U., but it was an excellent perk to new businesses or low-revenue businesses that may have hit a rough patch.
Now, the distance selling threshold has been removed entirely. Regardless of where you sell from, you must pay VAT on sales.
Introduction of the One Stop Shop (OSS) and Import One Stop Shop (IOSS)
The new changes to VAT also brought along the creation of the One Stop Shop, or OSS. The OSS was created to make it easier for businesses to register to pay VAT across multiple countries. You only need to register on the OSS to pay VAT in any E.U. country. The OSS is primarily for businesses located within the E.U.
For businesses located outside of the E.U., the Import One Stop Shop, or IOSS, is used. The IOSS serves a similar purpose to the OSS (and businesses will need to register for the IOSS through a country they intend to sell to). If a business is selling products valued at 150 euros or more, they’ll register through the OSS, regardless of where their business is located.
Removal of Low-Value Import Tax Exemption
Another important change to E.U. VAT rules is the removal of the low-value import tax exemption. Before, if an imported product was valued under 22 euros, then there was no VAT applied at all. The changes in 2021 have removed that exemption entirely, so any product sold to consumers in the E.U. will have some kind of VAT applied.
For products that are valued at more than 150 euros, standard import tax will be applied.
POS (point of sale) Responsible for Collecting VAT
Before the 2021 changes, VAT was declared on the value of the import. For example, a business could declare the value of a product to be very low (which is often the case for ecommerce), pay the VAT on the low value, and then sell the product at a marked-up retail price.
After the changes, VAT is no longer declared on the value of the import. Instead, it is determined by the retail sale price, and the point of sale (POS) is responsible for collecting the VAT from consumers.
VAT Is Only Calculated on Product Price
An interesting factor to how VAT is calculated is that it is only based on the sale price of a product, not other fees. That means if you separate a fee, like shipping, from your product price, then the VAT you pay will be less. For example, let’s say you sold a $100 product and charged $10 of shipping. If you sold it all at one price at a 20% VAT, it would look like:
$110 x 20% VAT = $22 VAT
However, if you separated the shipping out of that pricing, it would look like this:
$110 – $10 shipping = $100. $100 x 20% VAT = $20
If you want to remove shipping from the VAT calculation, you must separate the fee out on the invoice. This means you’ll have to decide between having a lower VAT with a visible shipping fee, or offering free shipping but having a higher VAT. Businesses may want to experiment with this, since having a visible shipping fee might hurt conversions.
Suppliers and Fulfillment Centers CANNOT Pay VAT for You
We’ve heard of several instances where suppliers tell businesses that they will pay the VAT on the businesses behalf so businesses don’t have to collect or pay VAT on sales. This is 100% false. The POS (and for DTC sellers, that means you) is responsible for collecting the VAT when products are sold and paying the E.U.
What Are the U.K. VAT Changes?
The U.K. also had VAT changes (though theirs went into effect on January 1st, 2021). While similar, it’s still worth taking a look at what the specific changes were:
VAT Is Assessed at POS
Just like in the E.U., the way VAT is collected has changed in the U.K. Now, retailers (including ecommerce stores) are responsible for collecting VAT, and customers will see the VAT when they finalize purchases.
Removal of U.K. Low-Value Import Tax Exemption
The U.K. also had a low-value import tax exemption (in the past, anything below 15 pounds was excluded from a VAT). That exemption has now been removed, so any product sold to residents of the U.K. will have a VAT assessed against it.
Why Were There Changes to U.K. and E.U. VAT Rules?
While it’s difficult to say exactly why these rules were changed, we can make a few assumptions as to why they might have been adjusted. Previously, direct-to-consumer sellers that were outside of the E.U. and the U.K. were often able to avoid paying VAT at all (as long as the value of their products were below a certain threshold).
However, businesses within the E.U. and the U.K. did not enjoy the same benefit. These VAT changes essentially level the playing field. Now, any business that sells products to residents of the E.U. or the U.K. are required to pay the same VAT.
Who Collects E.U. and U.K. VAT?
The short answer to this question is “ecommerce store owners collect and pay VAT.” However, depending on what specific platform you use, exactly how that looks will be a bit different.
Online Marketplace (OMP)
If you sell through an OMP, like Amazon, Ebay, or AliExpress, VAT will be collected through numbers those platforms set. You typically won’t need to worry about setting specific VAT percentages, and instead these platforms will set the VAT based on the location of your customer.
Direct Sellers/DTC China Fulfillment
For direct sellers that own and operate their own ecommerce store will be responsible for assessing, collecting, and paying VAT. This means they’ll need to be aware of the VAT percentages of specific countries they sell to.
This is also true of DTC stores that use China fulfillment. A fulfillment partner is not a point of sale, so they can’t collect and pay VAT on your behalf (including EcommOps).
Avoid Double VAT Tax
The changes to VAT means that it could be very easy to end up paying a double VAT tax. This is especially true for businesses using dropshipping methods, so it’s more important than ever to evaluate your operations and consider moving products through a more traditional supply chain.
Why can dropshipping fall victim to a double VAT tax? It’s because the “supplier” isn’t considered part of a supply chain. Instead, they’re seen as a point of sale themselves, so the buying process looks like this:
- A customer places an order on your online store, where you collect a VAT.
- Then, that order gets passed along to your dropshipping supplier.
- However, you technically are buying a product from another point of sale (for example, a storefront on AliExpress)
- VAT is applied again to this sale (this time, you pay the extra VAT to the new POS)
We’re still looking into if there are ways for businesses to reclaim the double VAT, though the best way to avoid this issue is to move away from a dropshipping fulfillment model (something that EcommOps helps businesses with every day).
Changes in VAT Rules May Be Challenging to Some Businesses
To be clear, these VAT rule changes are not going to break or ruin ecommerce in the E.U. or the U.K. Businesses will need to adapt to the new changes and be aware of new difficulties, including:
- Limited Cash Flow: You still have to pay the VAT upfront, which can hamper your cash flow. You may consider raising prices to compensate for this, but that can hurt your overall conversions.
- Extensive Paperwork: If your business is able to reclaim portions of overpaid VAT (the mechanisms of which have yet to be solidified), you’ll still need to keep invoices for up to six years.
Are China-based 3PLs (like EcommOps) Considered POS for New VAT Rules?
If you use a third-party logistics provider (either a China-based 3PL for DTC fulfillment, or a local 3PL), they are not considered the POS. They can’t collect and pay VAT on your behalf, and you are still responsible for collecting and paying VAT from purchases your customers make.
This is why EcommOps does not collect VAT from our clients, even though our clients still collect and pay VAT from sales they make.
How Do DTC Sellers Collect VAT When Using China Fulfillment
There are a few rules and general pieces of information to keep in mind if you’re a DTC seller using China fulfillment (or other fulfillment)
- Whether or not you actually collect a VAT from customers, you’re still responsible for paying a VAT to the appropriate government
- Most online stores (like Shopify), have built-in way to itemize a VAT charge for customers
- VAT is only assessed against the “intrinsic value of goods.” (Remember, shipping is not included in the intrinsic value of goods, so you can separate it and pay a lower VAT).
How Do You Pay U.K. VAT?
There are two important things you need to do. You need to register for a VAT number and an Economic Operators Registration and Identification (EORI) number. To get a VAT number, you’ll need to create a Government Gateway account, if you don’t already have one.
After you have a VAT number, you can register for an EORI number. If your ecommerce business is based out of the U.K., there are several pieces of information you’ll need to provide (but if you aren’t based in the U.K., all you need is a VAT number and a Government Gateway account).
After you have a VAT number and EORI number, you have what you need to be able to pay your U.K. VAT.
Submit a VAT Return
As you sell, you’ll need to file a VAT return to HM Revenue and Customs every three months. This confirms that you’ve paid enough VAT to the government (and if you’ve paid too much, it will show how much you should be getting back).
The deadline to file a VAT return is usually one month and a week after each quarter ends, so be sure to file the return promptly to avoid any penalties.
Keep Full Record (Including VAT Invoices) for 6 Years
It’s important that businesses keep all documents relating to sales and VAT payments (including customer invoices where VAT was collected) for six years.
How Do You Pay E.U. VAT?
Paying the E.U. VAT is a different process. If a business sells products in consignments valued at 150 euros or less, they pay the VAT through the IOSS. To register, businesses will need to go to the E.U. country they plan to sell to and register through the country-specific IOSS portal.
If a business sells products in consignments of more than 150 euros, they’ll register through the OSS, which is the same platform used for businesses operating within the E.U.
What Is the U.K. VAT Impact on China Fulfillment
The impact of the U.K VAT changes on direct-from-China fulfillment is actually very low. Businesses are continuing to pay VAT, the only thing that has changed is who collects the VAT and how the VAT is paid. With the changes, VAT is collected at the POS by ecommerce business owners when customers finalize purchases.
It’s also important for businesses to correctly follow the processes of VAT registration and EORI registration, as well as filing a VAT return every three months.
What Is the E.U. VAT Impact on China Fulfillment
The impact is similarly low. Again, businesses still pay a VAT like they used to, they just need to be sure to collect the VAT at the POS as customers finalize purchases. In addition, businesses should take care to appropriately register to pay VAT at the OSS or IOSS (whichever is appropriate).
China Fulfillment Still Has an Edge Over Local Fulfillment
While the VAT changes level the playing field for ecommerce businesses, China fulfillment still carries an advantage for many businesses. Businesses can still deduct shipping fees and other related fees from the VAT calculation, lowering the amount of VAT that they have to pay.
Remember, the shipping has to be itemized separately from the product price to do this, which means you won’t technically have “free shipping,” (even if the overall cost to consumers remains the same).
EcommOps China Fulfillment Plan for E.U. and U.K.
We are confident that our fulfillment expertise will make it easy for ecommerce businesses to continue to thrive in the E.U. and U.K. markets. EcommOps recommends that clients get a VAT number for the E.U. and the U.K. as soon as possible, though packages without a VAT number can still be shipped for now.
EcommOps is constantly checking to see how to best comply with new laws and emerging interpretation of laws, and our goal is to be 100% compliant with the trade laws of any given country.
If your business sells to a U.K. or an E.U. market, and you need a fulfillment partner that can help your business navigate the challenges of the new VAT laws, EcommOps would love to connect. We can simplify your supply chain and help your business leverage the advantages of China fulfillment.
You can fill out our contact form, and we’ll be in touch to see how EcommOps can elevate your supply chain.
VAT FAQs
1. Who is affected by the new U.K. VAT changes?
The new U.K. VAT changes affect any business that sells to customers based in the U.K. This includes businesses located inside and outside of the U.K.
2. Who is affected by the new E.U. VAT changes?
Like the U.K. changes, the E.U. VAT changes affect any business within or outside of the E.U. that sells directly to E.U. citizens.
3. Can orders be fulfilled to the U.K. from China without a VAT number?
Yes, for now, but EcommOps or YunExpress are not responsible for any issues caused during the process of customs clearance or compliance inspections. Register for a VAT number as soon as possible to avoid unnecessary complications.
4. Can orders be fulfilled to the E.U. from China without IOSS registration?
YunExpress and other popular China couriers require IOSS registration or another form of custom clearance in order for orders to be fulfilled from China.
5. What is the distance selling threshold?
Before the VAT changes that took place in the E.U. on July 1st, 2021, EU-based sellers selling in the E.U. could avoid VAT if they sold below a certain monetary threshold. However, that has been changed, and all sellers, whether or not they’re based in the E.U., must pay a VAT.
The same happened in the U.K. on January 1st, 2021, where all sellers must now pay VAT.
6. Risks of not complying with new VAT rules?
Not complying with the new VAT rules would be seen as tax evasion, a type of tax fraud, which is a criminal offense in the U.K. Penalties include a maximum of six months jail time and/or a fine of up to 20,000 pounds.
7. Is VAT the same as a sales tax?
While they look similar, a VAT is different from sales tax. A sales tax is only ever collected once, which is at the point of sale. No other part of the supply chain is required to pay a sales tax.
A VAT is levied at multiple stages of a given supply chain, where all members of the supply chain are required to pay.
8. What is the VAT when shipping to the U.K.?
The current VAT of products sold to consumers in the U.K. is 20%.
9. What is the VAT when shipping to the E.U.?
The VAT applied to products sold to consumers in the E.U. will vary depending on which specific country you’re selling to. However, businesses can expect to pay between 15% and 27% in VAT when selling to consumers in the E.U.
10. Where can I find ecommerce VAT registration?
The following links have information about VAT registration for the E.U.:
The following link will give you more information about U.K. VAT registration:
If you’re considering expanding your ecommerce store to sell to customers in the E.U. and U.K., EcommOps can help! Contact us, and we’ll be in touch about how to best navigate the VAT changes and how to streamline and upgrade your supply chain.
