Following the end of the Brexit transition period, many UK SMEs now have a choice to make regarding how and whether they continue to trade with the EU. 

Prior to 1 January 2021 a UK business selling to individual consumers within the EU could make use of the ‘distance selling thresholds’. This allowed a UK business to sell goods to customers across the EU without a need to register for VAT in any other EU country, as long as the value of sales to a particular country did not breach this threshold (approximately 35,000 euros per annum). Instead they would simply charge UK VAT to the customers and declare these sales on their UK VAT returns.

However, from 1 January 2021 the distance selling thresholds no longer apply for UK businesses selling into the EU, so if a business is acting as the importer of the goods there will be a requirement to register for VAT in each of the EU countries they are selling to.

Having to register for VAT comes with associated delays, administration and cost – the last thing that some UK SMEs need after the tumultuous last year. A recent impact assessment from HMRC found that British businesses would need to handle a startling 215 million more import and export declarations each year. 

Thankfully, a UK business struck by these changes has a number of options available to them to help reduce this disruption and cost.

Pass on the costs

The first option available is likely to be the least commercially viable. A UK business could treat the supply to the customers as being a zero-rated export for UK VAT purposes.

The issue here is that the goods would then be subject to import VAT on arrival into the EU, meaning that the customer would need to pay this import VAT in order to take delivery of the goods. This could deter customers if they have to pay import VAT for their parcels to be released.

Register for VAT in each EU country

The second option that the UK business may choose is to be the importer of the goods themselves when the goods are shipped into each EU country. 

This would mean that the UK business would need to register for VAT in that country, pay the import VAT (and recover it subject to the normal rules in the EU country in question) but this would result in a subsequent requirement for the UK business to charge VAT at the rate applicable in each of the EU countries where they are selling the goods. 

This option may be manageable if the UK SME sells to a small number of EU countries, however, if a UK business were to be selling to all 27 EU member states, the cost of registering for VAT in every EU country along with the additional compliance costs is likely to lead to question marks over this option.

Choose an EU ‘base’

The third option is to choose to hold stock in one EU country and fulfil orders from this EU country. This would require the UK business to register for VAT in that EU country but in turn this would allow the import VAT to be paid (and recovered) by the UK business.

As the UK business would then be registered for VAT in that EU country, the onward supply of the goods to the customers within the EU could then be treated as intra EU supplies in the same way as currently, i.e. subject to the normal distance selling thresholds.

It is worth noting here, however, that on average it will take between 4-6 weeks for a registration to be processed in an EU member state so if a business were to adopt this approach, there may be significant delays to the shipment of the goods.

Look to your freight agent

The fourth option is for the freight agent to take responsibility for the import of the products. If this option was adopted, there would be no need for the UK business to register in other EU countries, but the freight agent would be charging UK businesses the import VAT incurred which would be an additional irrecoverable cost to the business.

But what’s coming down the track?

Even if UK businesses are quick off the mark to adjust to the new VAT dynamic and requirements, change is still afoot. 

From 1 July 2021, the EU is also removing the distance selling thresholds, replacing them with the Import One-Stop-Shop (IOSS). This allows a business to charge the relevant VAT rate in the country where the goods are being sold, but declared on a single IOSS return to the tax authority in their own country (who distribute it to the other countries).

The good news is that UK businesses can also use this One-Stop-Shop system, but would need to register as a “Non Union” taxpayer in one EU member state of their choosing.

The UK business would need to submit regular domestic returns in that country, but would then file the quarterly IOSS returns like any other EU e-commerce business, preventing the need for them to register in every EU country they are selling goods into.

This may offer a more streamlined option from the Summer, but until then the complex new requirements and the additional costs may lead many SMEs to make the decision to choose to focus on non-EU markets, especially if they already have a recognised process in place for such supplies. Alternatively, we may see an inevitable increase in prices charged to EU customers as UK businesses attempt to offset the additional compliance costs of selling to the EU.

The waters will calm eventually but, at least for the moment, it is currently choppy seas for UK SMEs. Hopefully the above options will help you navigate the post-Brexit storm.