Compliance challenges of the new VAT distance selling regime

What are the practical challenges for accountants and finance teams from the new scheme that came into force in July?

In July, new EU business-to-consumer (B2C) distance selling VAT trading rules came into force, affecting everyone in the supply chain, from UK businesses selling and trading with EU countries, postal, delivery and courier services as well as customers themselves.

Intended to simplify existing VAT rules overall and put both EU and non-EU businesses on an equal footing, current distance sales thresholds have been abolished and instead, goods and services sold to EU consumers are now taxed according to local rates, meaning that EU member states will benefit from VAT revenue.

A new EU Import One Stop Shop scheme (IOSS) for goods of up to €150 in value has replaced the previous small consignment relief. The IOSS facilitates collection, declaration and payment of VAT on behalf of UK sellers.

To ensure compliance with the new distance selling regulations, there are several steps that affected businesses and sellers must undergo and consider, including:

• Businesses selling goods and services valued at under €150 per transaction can register for IOSS.
• Businesses registering for IOSS must appoint an EU representative.
• Businesses selling goods and services valued over €150 per transaction must register for VAT for every EU member state they sell to.

It’s been just over six weeks since the introduction of these rules. We asked accountants how their affected clients have navigated these changes and how they’ve been supporting them.

We’re supporting clients in seeking local VAT advice while ensuring VAT does not end up driving business practices

Andrew Norman, VAT director, Menzies LLP

For businesses exporting goods to the EU, the main challenge is knowing whether or not to register for VAT outside of the UK, depending on the incoterms of sale. There are a number of possible solutions to this issue and many exporters are looking at setting up a warehouse in the EU or Northern Ireland.

The introduction of IOSS will help prevent the need for multiple VAT registrations. However, this will present a new challenge, as systems will have to cope with multiple VAT rates.

Next steps: As well as carrying out reviews of clients’ working practices, supply chains and VAT exposure in other EU countries, we’ve also been supporting them in obtaining local advice and then making recommendations about the best VAT solutions. There’s no ‘one size fits all’ approach and it’s important that VAT does not drive business practices.

Verdict: We’re supporting clients in seeking local advice, while ensuring VAT does not end up driving business practices.

Majority of clients have opted to appoint EU representatives

Zainab Siddiqui, partner, Reddy Siddiqui LLP

The new VAT registration and accounting requirements including non-union Mini One-Stop Shop (MOSS), IOSS and lower threshold requirements for registration and all shipments now attract VAT at the rate in the buyer’s country of residence. This now makes UK goods less competitive in the EU.

The changes have created a number of challenges for clients:

• Some are struggling with increased compliance as businesses now need to keep clear evidence of sales and provide corresponding IOSS numbers to the customs declarant/ shipper.
• Customers may have to pay the VAT to the shipper at the time of collection if the business has not registered properly.
• Many businesses are cash-strapped due to Covid-19 and are struggling to invest in technology or processes that would simplify the process.
• Rules around import VAT is also leading to customs delays.

However, most of our clients now have systems in place and the majority have also opted to appoint EU representatives to deal with OSS.

Next steps: We’ve been supporting clients by:

• Keeping them up to date with regulation and associated requirements (e.g. providing new margin information on EU sales and whether certain markets remain profitable).
• Providing cashflow information to help plan EU VAT payments and refunds.
• Encouraging clients to register for IOSS.
• Helping with registrations including duty deferment scheme and preparation of monthly reports for submission by their EU representative through OSS.
• For some larger clients, we’ve helped them to start a subsidiary in a member state where this has been the appropriate course of action.
• We’ve also encouraged our smaller clients to use more up-to-date accounting software and provided hands-on software training.

Verdict: When exporting to the EU, the most practical solutions are either setting up a VAT registration in the EU or ensuring that the client is the importer of goods and therefore deals with the VAT on import.

Most e-commerce companies are geared up for working across multiple VAT jurisdictions

Rob Hackney, tax manager, DSG Accountants

The VAT rules still allow businesses to sell into the EU, with local registration required above specified sales thresholds.

In a minority of cases, issues around the classification of certain goods – linked to customs duty – prevented companies from supplying into the EU in the short term, but most e-commerce businesses were already geared up for working across multiple VAT jurisdictions given the nature of their business.

Some clients opened EU-based subsidiaries, commonly in Ireland and France due to their geographical proximity to the UK, to reduce the impact of import hurdles and additional administration. This led to a short-term flurry of activity, but most such businesses are now operating relatively smoothly.

Next steps: We’ve assisted clients with every aspect of the transition – including applying for EORI/XORI numbers. We also utilised the experience of EU-based colleagues to advise clients on local rules and form local subsidiaries.

Verdict: There were initial issues, but most e-commerce companies were already geared up for working across several VAT jurisdictions.

Clients are relying on marketplaces and subscription-based software to ensure compliance

Sarah Shears, director and head of VAT, Anderson

Many businesses have reached out for specialist advice and various different approaches taken:

• Some businesses are selling through marketplaces which already have the necessary technology set up in order to calculate VAT in every single EU country.
• Some have set up EU companies in territories where they carry out significant volumes of sales.
• Others have invested in EU-based warehouses.

Challenges have included:

• Registering for both OSS and IOSS and identifying which sales should go on which return.
• Adapting to different VAT treatments depending on the value of the sale (e.g. under/over 150 EUR in the EU and under/over £135 in the UK).
• Numerous complexities and rules whether businesses sell to EU, UK and Rest of World.

Clients are relying more heavily on the use of marketplaces and using subscription-based software that allows businesses to set up an online shop to sell their products. This type of software will automatically charge the VAT rate of the buyer’s shipping country for sales within the EU, where applicable.

Next steps: We’ve undertaken supply chain analyses for clients, set up new entities and new VAT registrations and helped set up EU structures while advising on VAT and tax implications.

Verdict: Clients are relying heavily on marketplaces and subscription-based software

Some clients are investing in an EU warehouse to cut costs and remain competitive

Carla Horsfall, VAT director, BHP

Many of our clients previously only dealt with the EU single market, so they’ve had to adapt to complex issues such as, who’s responsible for paying import duty and VAT when it enters customer territory.

A lot of businesses have had to engage with agents with a better understanding of the new systems while managing customer expectations as initially orders were delayed.

Several clients who have UK warehouses have since decided it’s no longer economical and are setting one up in the EU instead to avoid additional costs and remain competitive, as their products come into the UK and then back out to the EU.

Next steps: We’re providing regular, up-to-date information, helping clients apply for funding schemes and we’re always available to answer any questions.

Verdict: Some clients have invested in EU warehouses to cut costs and remain competitive.

Annie Makoff is a freelance journalist and editor.