When US sellers and merchants hear about BREXIT, they usually think this is a “European problem.” But a change in how the UK will process imports starting on January 1, 2021, will affect many “low-value” shipments from non-UK based small business sellers and merchants to UK customers.
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In a nutshell, the UK is making it now the responsibility of merchants located outside the UK to collect VAT on every sale under £135 (about $180). Failure to do so can cause delivery delays and the shipment being returned to the seller.
This new rule is especially problematic for US merchants that do not sell on marketplaces like eBay, Etsy, and Amazon as the regulation requires marketplaces to collect and remit VAT. But marketplace sellers must properly declare items, even if they are not on the hook for collecting the tax.
The HMRC (Her Majesty’s Revenue and Customs) agency handles collecting VAT on imported goods, and it has issued guidance for non-UK based merchants.
Since the purpose of this FAQ is to help US-based small business merchants and online sellers, we make the following assumptions:
- Seller/Merchant is a legal US entity operating from a US address and shipments originate from the US.
- The US Seller/Merchant has no inventory in the UK or in an EU country.
- US Seller/merchant is not drop-shipping items to a UK customer from a UK, Northern Ireland, EU, or other third countries.
- The item sold is a physical product, not a digital service.
- The term UK in this FAQ includes Northern Ireland (we explain later why).
The VAT rules “explained”
What is VAT? VAT (Value Added Tax) is a relatively unknown tax collections scheme in the US. VAT is a kind of sales tax, except the tax is generally assessed incrementally on the price of goods and services at each stage of production. Unlike the US, where sales tax is charged only at the point of sale to an end consumer, in a VAT based system, the tax is applied at every interim level in the production and supply chain (raw material, wholesale, etc). For reference, this Wikipedia article explains VAT very nicely and how it differs from sales tax.
The current VAT rate for the UK is 20 percent for goods imported from the US.
What does this have to do with BREXIT? Because the UK is leaving the EU’s customs union, the UK implemented new policies and procedures to deal with the importation of goods. In the US, news stories about BREXIT would mention the challenges to negotiate a trade agreement that kept most goods free from import duties and restrictions but rarely mentioned VAT.
BREXIT is changing how the UK is managing VAT and now it has placed the burden of collecting VAT on small orders (those under £135 or about $180) on non-UK based merchants, instead of the previous EU-based scheme when consumers paid VAT along with other customs duties at the time of delivery/importation. One reason for the change given by the HMRC is to level the playing field for UK merchants competing with merchants in countries that do not have VAT (such as the US).
Is there a minimum before I have to collect VAT? This is another big change. In the past, the UK had a minimum of £15 (about $20) order value requirement before VAT was collected. With this new regulation, there is no minimum threshold and all shipments are now subject to VAT.
What about orders over £135? The good news here is that orders over this amount will continue to be handled as before, placing the burden to pay on the UK recipient. The seller does not have to collect VAT at the time of sale for these orders but must provide commercial invoices that clearly state they collected no VAT.
How is the value determined for the VAT thresholds? The UK considers the actual retail price or selling price of the product(s) for VAT, exclusive shipping, insurance, and other tax costs. They base the value on the total order, meaning if a customer orders multiple items and the selling price of the items in the order is under £135, the seller has to collect VAT. If the order is over £135, the seller does not have to collect VAT.
How do I collect and submit VAT to the UK? Unless you only sell on marketplaces such as eBay, Amazon, Etsy, etc. (more on that later), you will need to register with the UK for VAT. The collection of VAT will require knowing and understanding which products or categories of products are subject to VAT. You will need to file regular paperwork and make arrangements to pay the collected VAT to the UK government. It will also require you to correctly display VAT in your store and need to identify the tax accordingly on import documents.
For high volume sellers (those with £85,000 or more in UK VAT taxable turnover), there are additional requirements. Those sellers should seek professional help to determine their VAT collection requirements, including which sales apply to the threshold, such as those managed by marketplaces where the marketplace is collecting the VAT.
I only sell on marketplaces. Do I also need to register? You are in luck. Marketplaces like eBay, Etsy, Amazon, etc. are required to collect VAT on applicable sales as long as the product is not located inside the UK. They will charge the buyer at the time of the sale and the marketplace may display the price of your item with VAT included.
However, the £135 threshold is based on the total value of the shipment (excluding shipping and other costs mentioned earlier). Therefore, marketplaces may not collect the VAT if the buyer purchases multiple items and the value of the order exceeds £135. In that case, the UK will collect VAT from the buyer at the time of importation/delivery. That could lead to customer confusion when HMRC attempts to collect VAT from the buyer, but it initially showed the buyer prices including VAT.
The HMRC also places the burden of creating proper import documentation on marketplaces which clearly shows how VAT was handled on this shipment. Sellers that create separate commercial invoices for carriers need to make sure they match the marketplace invoices.
Still, selling only on marketplaces simplifies the new UK VAT issue as the entire burden either falls on the marketplace on small orders or the buyer on larger orders. However, sellers should realize that just like sales tax and shipping costs, sellers may be responsible for payment processing fees on VAT collected, adding a small “administrative” cost to every order.
Will UK buyers now pay more for US products? Unless the product was below the free VAT threshold of £15, the final cost of the product to the UK consumer should be the same as before. But there is a caveat. Instead of paying VAT at the time of import, the UK consumer is now paying VAT at the time of sale. The UK consumer will still be responsible for any import duties or other government fees as before.
For orders below £15, UK consumers are now paying more as that item will now be charged for VAT and no longer qualifies for the low item exemption.
Suggestion: Sellers with marketplace listings may wish to highlight in their listings that UK prices now include VAT. Because so much is new for UK consumers due to BREXIT, many don’t realize this new rule also applies to non-EU countries. Highlighting that VAT is now included in prices may help buyers understand why prices seem to have “increased” if they purchased from your store before.
I ship through the eBay Global Shipping Program. Do I have to do anything? No, eBay takes care of everything and sellers do not have to make any changes to their listings. The eBay Global Shipping Progam collected all taxes previously, so the final price to the buyer should remain the same.
What about Business to Business (B2B) sales? If you sell products to a UK business with a VAT registration, you can avoid having to collect the VAT tax and make it the responsibility of the UK business to submit VAT on the order to the UK government. The UK HMRC explains the process this way (FYI – OMP is their term for marketplace):
“The OMP or direct seller must add a note to the invoice it issues to the UK business customer to make clear that the customer needs to account for VAT. The OMP or direct seller should include a reference to ‘reverse charge’ on the invoice, for example, ‘reverse charge: customer to account for VAT to HMRC’.
But for marketplace sales, this could be tricky again, as the marketplace must be able to handle such as “tax exempt” sales. The HMRC is placing a significant collection and reporting burden on marketplaces, so marketplaces are likely going to err on the side of caution and collect VAT, even on small B2B sales.
Furthermore, the HMRC says that sales should be considered B2C (business to consumer) sales absent the recipient providing a valid VAT number which needs to be added to the commercial invoice.
How does the UK know I am business, my return address is my home and doesn’t include my business name? Good question and “wink wink” how many sellers have helped buyers avoid duties in the past? But those days are over! There is not a VAT requirement on consumer to consumer shipments, but the HMRC has developed a “business test” which can be found here.
Cheating the system may work for a while (especially during the early chaos of implementing new BREXIT rules) but at some point with better detection technologies, governments catch up. If you prepare labels from eBay or PayPal, they may include the company logos on their labels. If you ship using UPS or FedEx and use electronic customs forms, you are also likely exposing yourself to being a business.
The HRMC warns, “In addition to risk-based checks at the border, HMRC will, as it does now, carry out extensive risk-based compliance activity away from the border using various data sources to identify and tackle non-compliance.”
And since the new rules extensively include marketplace requirements, if a marketplace suspects that a seller is engaging in active circumvention of VAT, for which it is the responsible party, the marketplace could take actions against sellers. The bottom line is that sellers should follow the rules to avoid risking their long term business, especially if selling through marketplaces.
What about sales before January 1, 2021 that are in transit or about to be shipped? The HRMC says, “…if an order is placed and payment received from the customer on 31 December 2020 then the new rules will not apply, even if dispatch and delivery take place after 1 January 2021.”
However, since this new rule comes into effect when the UK is breaking away from the EU, and it just completed negotiations on its trade agreement with the EU days before the “hard BREXIT” deadline, many observers believe there will be a lot of teething problems regarding trade (and VAT). Expect problems and delays.
Does this new rule also apply to UK territories or Northern Ireland? Northern Ireland has a special agreement within the UK’s BREXIT trade deal with the EU. But, for US sellers, the UK VAT rules apply to shipments to Northern Ireland.
The Isle of Man is a bit unique too, as it is a self-governing British Crown dependency. The HMRC website omits how shipments to the Isle of Man should be handled, but the Isle of Man government site on BREXIT and VAT references the HMRC’s new VAT scheme. Therefore, if the Isle of Man is listed as a separate country in your online commerce platform, you will need to address the VAT issue just like the UK.
Gibraltar and the Channel Islands are British Overseas Territories located in Europe but have no VAT. Again, very little mention by HMRC on those, but with no VAT, they shouldn’t be part of the new UK VAT scheme. Other British Overseas Territories also have no mention on the HMRC site and generally operate under their own importation rules, and it does not appear the UK’s new VAT scheme will affect them either.
I didn’t know all of this – what do I do now?
We created this FAQ to help US-based small business sellers. If you are only selling on major marketplaces like eBay, Etsy, or Amazon, you are okay and there is nothing you need to do (please read each marketplace’s information – see links below in resource section). If you are selling on other marketplaces, check with them how they are handling this new UK VAT requirement. By UK law they are supposed to manage it for sellers.
If you are selling on your own website or if you have direct customers in the UK, the system has changed a lot. You will need to make some business decisions and in the short term, you may want to consider suspending low-value sales to the UK until you can figure out how you will manage orders under £135.
Avalara and TaxJar are both US-based tax automation services that offer VAT services and that may be the easiest solution for US small businesses that routinely sell to the UK. The other option would be to implement a minimum order of £135 (or $200 to be safe) for all UK destined sales to shift the issue to the buyer.
The FAQ was researched to provide the best possible “quick info” on this new UK VAT requirement (specific to US merchants) that will start on January 1, 2021. It is not legal or professional accounting advice. Please consult your carrier(s), customs broker, legal, accounting, warehouse, fulfillment, and online commerce partners for more details and professional advice.
Here is a list of additional trusted resources that provide more in-depth information on this new UK VAT requirement for US sellers. We will update this post with relevant news/links that may shed more light on this new UK VAT requirement. (Last update: January 4, 2021)
- UK HMRC website explaining the changes
- Amazon Seller Central – VAT changes on sales to US customers
- eBay Main Street – New Value Added Tax (VAT) Arrangements for US Sellers Exporting to UK
- Etsy – How VAT Is Collected on Physical Items Sold on Etsy
- Avalara – VAT Live – BREXIT Updates
- Avalara – How will Brexit impact U.S. sellers and marketplaces?
- TaxJar – TaxJar Will Continue to Support UK and EU VAT Post-Brexit
- Quaderno – 2021 Brexit Guide for UK VAT (for EU, US, and worldwide Sellers)
- KMPG – Northern Ireland VAT Rules
- Equiom – Brexit Update: VAT and the Isle of Man
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