How will Brexit impact U.S. sellers and marketplaces?
Brexit, a day of reckoning, will be complete January 1, 2021. After years of nail-biting, negotiations, planning, and a lengthy transition period, the U.K. is finally leaving the EU Customs Union and VAT regime. What does this mean for U.S. merchants selling into the U.K.?
The impact of Brexit will be felt primarily by businesses based in the EU and U.K. However, the new U.K. ecommerce package does affect businesses based in the United States, especially retailers and marketplaces that sell directly to U.K. customers. Read on for details.
Low-Value Consignment Relief ending
The first change is the elimination of Low-Value Consignment Relief (LVCR). While commercial imports of goods valued at or below £15 are exempt from import VAT through December 31, 2020, all imports are subject to import VAT on and after January 1, 2021.
There are three VAT rates in the U.K.:
- 20% standard rate (most goods and services)
- 5% reduced rate (some goods and services, such as car seats for children)
- 0% zero rate (some goods and services, such as most food staples and children’s clothes)
Businesses that sell goods or services subject to any of the above rates, even the zero rate, must register for VAT. Businesses that sell exempt goods or services, such as postage stamps or financial transactions, may not need to register.
UK VAT registration needed to sell goods from outside the country
Also effective January 1, 2021, most U.S. businesses accustomed to paying import VAT at the U.K. border — or leaving it to their U.K. customers to settle — will instead have to charge and collect U.K. sales (aka, supply) VAT at checkout. This applies to any consignment sent from the U.S. valued at or below £135 (about $180, depending on the exchange rate). Sellers must report and pay the collected VAT through a regular U.K. VAT return.
“Do not delay!” urges Richard Asquith, vice president of global indirect tax at Avalara. It can take a few weeks to obtain U.K. VAT registrations, and unregistered sellers risk having their shipments stopped by the U.K. border control authorities.
This is a big change — one many U.S. sellers and marketplaces are unaware of. Currently import VAT is collected upon clearance by customs or the delivery agent. After the start of the year, U.S. sellers won’t be able to get goods into the U.K. without registering.
Goods valued above £135 will continue to be subject to the current VAT procedures. Thus, sellers with a U.K. VAT number can pay the import VAT and duties upon clearance at customs, then reclaim them, or they can require customers to pay the VAT at customs or to the delivery agent.
Marketplaces take on their sellers’ VAT obligations as ‘deemed supplier’
For marketplace transactions, the marketplace facilitator will become the deemed supplier if the shipments do not exceed £135. Thus, the marketplace itself, not individual marketplace sellers, must register for VAT and charge VAT at checkout. Marketplace sellers will need to register only if they make direct sales as well as marketplace sales in the U.K.
Some marketplaces may adjust inventory storage limits as a result of Brexit. For example, Fulfillment by Amazon (FBA) sellers will have one storage limit for U.K. inventory and a second set of storage limits for inventory in continental Europe. FBA sellers with inventory in both the EU and the U.K, will need to monitor inventory limits in the EU and inventory limits in the U.K.
Six months after these changes take effect in the U.K., B2C ecommerce sellers and marketplaces will face similar, new VAT obligations in the 27 EU member states. Starting July 1, 2021, facilitating marketplaces will become the deemed supplier responsible for VAT on third-party import sales if the consignment intrinsic value doesn’t exceed €150. In France, marketplace facilitators may become the deemed supplier on all import transactions.
Perhaps the best way for U.S. businesses to brace for the changes ahead is to consider it a Wayfair moment for Britain: It will affect many businesses as much as the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. (June 21, 2018), which overruled a longstanding physical presence rule thus enabling states to require out-of-state businesses to collect and remit sales tax.
Keep your finger on the pulse of change and learn how Avalara can help reduce your tax compliance burden in Brexit: how to manage the VAT and customs risk and Brexit, where are we now? You may also want to follow the VATlive blog for the most up-to-date information.
The 2021 sales tax changes report: midyear update
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