How to beat Brexit from a VAT perspective

Tomasz Połeć
How to beat Brexit from a VAT perspective

UK’s exit from the European Union had consequences in many areas, including the e-commerce industry. Most of UK e-commerce sellers are already aware that introducing new post-Brexit trading rules last year resulted in a “major shock” to UK-EU trade.

Based on the research from the LSE Center for Economic Performance, UK imports from the EU decreased by 25% in comparison to 2021. At the same time, UK exports to the EU in the first ten months of 2021 decreased by 12%, returning to 2019 – pre-pandemic – levels.

Some smaller exporters, particularly those selling lower value items, may have given up selling to Europe due to the formalities cost. Many companies avoided sending goods across the border in the previous months, for fear of disruption or delay, shipping orders ahead of time when it was possible.

However, EU market remain the major target for UK companies. They simply cannot cough up 30-40% of their business to EU competitors.

One of the main reasons of the trade obstacles relates to the very complicated VAT rules and EU-import formalities. How to sell the goods in EU in the most efficient way? Is there any chance to simplify the import-custom procedures? You will find out in the following article.

Potential options

As a basic rule, for UK VAT purposes the sale of goods to EU customers should be considered as a zero VAT-rated exportation of goods. The issue’s emerge upon arrival of the goods into the European Union territory. Who should be charged the VAT on the imported goods? Is the customer responsible for VAT settlement or any other custom duties? Or maybe the UK seller is obliged to register for VAT purposes in one of the EU countries? When you review the VAT provisions you can clearly see that there are only a few options depending on the warehousing country, value of goods and importer status. Based on our experience, the UK sellers choose between the three following options:

  1. Customer is obliged to pay the custom duties
  2. Vendor uses a VAT iOSS procedure
  3. Vendor takes advantage of a fulfillment center located in one of the EU countries

You can find our comments on each of those options below.

Customer is obliged to pay the custom duties

Personally, on a commercial front, we believe that it isn’t in the best interest of a British business. This option applies in cases where the VAT iOSS procedure is not applicable and goods are shipped directly from the UK.

Regardless of the package value, the goods will be delivered to the customer only after paying customs duties. VAT issues seem to be complicated for an e-commerce merchant, so please try to imagine your customers’ frustration if they are requested to pay additional fees for your goods. In many cases, they may simply refuse to pay any customs fees, which means cancelling the order. The goods are shipped back to the UK, and guess who has to pay for the extra shipping costs?

Delivery time is also a big problem. Considering the mess associated with customs fees, packages are often delivered to customers after 3-4 weeks. It is also not uncommon for a package to be damaged after weeks of traveling between the warehouses of shippers and customs.

If you want your business to be taken seriously – do your best to take charge of customs clearance.

Alternatively, you can decide to act as an importer of goods shipped to any EU country. However, this means that you must register as a VAT payer in that country and pay VAT on the imports. You then have to report local sales and charge VAT at the rate applicable in each EU country in which the goods are sold. Such a scheme requires a lot of VAT compliance work and additional costs.

VAT iOSS

The VAT iOSS procedure appears to be a potential solution to the above-mentioned problems. In a nutshell, the iOSS scheme means that a UK seller can be voluntarily registered for import VAT, meaning that the VAT due at customs is paid by the vendor.

In practice, this requires choosing one of the EU countries (could be France, Germany, Poland, etc.) to register for VAT iOSS. You then file one common monthly VAT return that details your sales in each EU country. You will pay VAT based on the VAT rates applicable in the country of final destination of the goods, but the tax return is filed in the country where iOSS is registered (you do not need to make separate VAT registrations in other EU countries). VAT payment is also made to a single tax office located in a country of your choice.

It seems very easy. However, there is a tricky part. First of all, keep in mind that you will need professional support in the country of iOSS registration. EU countries require a non-EU vendor to appoint a sort of “tax representative” who is responsible for timely reporting and payment of VAT. In the event of any tax liability, this tax representative may be financially liable on behalf of the seller. Therefore, the fees of VAT compliance companies are quite high, as they have to cover the incurred risks.

In addition, the VAT iOSS program can only be used for packages under €150. If you sell more expensive goods, you will not be able to account for VAT on behalf of your customer. The same grisly story as described in option 1 will take place.

So maybe you should prevent your customers from making purchases over €150? That’s pretty weird, isn’t it?

Even if the payment is managed by the seller, the delivery time is still significant. Customs clearance (even if simplified) still has to be performed. As a result, it often takes 2-3 weeks for a package to reach EU customers. A little better, but not satisfactory in e-commerce realities.

Stock in one of the EU countries

The third option is to choose to keep inventory in one EU country and fulfill orders from that EU country. VAT requirements can be outlined in 3 simple steps:

  1. VAT registration in the country where the inventory is held.

    VAT registration for a UK vendor within the EU is a fairly easy process. For example, in Poland, all you need is a power of attorney for a local representative and copies of the business register extract and confirmation of VAT registration in the UK. The process will usually take 1-2 weeks, counting from the date of submission of the registration application to the tax office.

  2. The procedure for applying for VAT OSS

    Once you have obtained a local VAT number, you can apply for the VAT OSS procedure. The VAT OSS procedure is similar to the iOSS procedure, however it applies to goods located in the EU on the date of the order. It allows the vendor to show the VAT due in different EU countries in one common VAT return. The registration process takes about 1-2 days.

  3. Import of goods – VAT payment and customs duties (VAT can be recovered in the local VAT return)

    When shipping goods to a fulfillment center located in the EU, you must clear customs in the EU and pay the appropriate import duties and VAT. It sounds complicated, but it’ a very smooth process when you engage a local customs agency. All you have to do is pay them to clear customs for the entire group of goods, instead of each individual package shipped to the EU. This means huge savings compared to shipping goods directly from the UK.

    Keep in mind that there are several ways to ease the tax burden when importing goods into the EU. For example, you might consider a duty exemption for goods coming from the UK, or an import VAT deferral program (you only declare VAT on your local VAT return instead of paying directly to customs). Contact your customs agency or local tax advisor for more details!

  4. Reporting EU sales in one common OSS VAT return

    As a general rule, sales to EU customers should be charged VAT according to the rate of the country of destination of the goods (regardless of where the goods are stored). For example, if you ship goods from a Polish warehouse to a customer based in Germany, you will have to apply German VAT.

    However, you do not have to be registered in every EU country. If you use the VAT OSS procedure, you can file one common quarterly VAT return, in which you declare the VAT due in each EU country. If you are registered for VAT in Poland, the VAT OSS return is filed with the Polish tax office. Payment for VAT is also made to the Polish tax office’s bank account, and it is the tax office responsibility to remit VAT to each country, in the amounts indicated in the return.

Why choose a Polish fulfillment center?

As you already know, we believe that using a fulfillment center in the EU and registering for VAT OSS is the most satisfactory solution from both the seller’s and buyer’s perspective. So which country will be the best option? There are 3 main advantages of using a fulfillment center located in Poland:

  1. Lower warehouse costs

    At the moment, many prices for goods and services in Poland remain lower than in other European countries. This rule also applies to Polish fulfillment centers, which have some of the lowest rates for their services.

  2. Location in the center of Europe

    In addition to significantly lower rates, Poland is located in the center of Europe. From our experience, a package from a Polish warehouse can be delivered to other EU countries within 1-3 days, whether to Western European countries such as Germany or France, or to Baltic countries such as Sweden.

  3. Lower VAT costs and English-speaking experts

    As with fulfillment services, Poland also has significantly lower rates for VAT Compliance services compared to other European countries. In addition, the level of these services is high, as Poland has many experienced VAT Compliance experts who speak foreign languages, including business-level English.

Quick recap

The EU is a huge e-commerce market worth considering if you’re thinking about scaling your business. Although Brexit has greatly complicated sales in continental Europe, it is still possible. Depending on your needs, the scale of your business and the type of products you sell, you have 3 main options:

  • The customer pays for the obligations. The easiest way, but it has a huge impact on the quality of the customer’s life.
  • VAT IOSS. A little more complicated, unfortunately it can be quite expensive and inefficient due to the shipping process. A solution dedicated rather to small sellers who occasionally send goods to the EU. In addition, this option is only valid for packages under €150.
  • EU-based fulfillment center. The most efficient solution, requiring a bit of effort on the vendor’s part to set up the process, but with the help of professional 3PL vendors and proven VAT Compliance consultants, it should not be much of a problem. A solution dedicated to larger vendors who take EU expansion seriously.
Tomasz Połeć
Tax Adviser | Taxology
Tax Advisor with many years of experience working for international tax consulting firms. He specializes in advising the e-commerce industry - particularly on VAT. He is co-founder and board member of taxology. co, providing VAT Compliance services in Europe for the e-commerce industry.