As a result of the final Brexit deal agreed at the end of 2020, e-commerce companies selling between the United Kingdom and the European Union must face a range of new, potentially intimidating challenges. These challenges can be especially tough if you’re a small- to mid-size business (SMB).
We’ve created this “Splitit Guide to Brexit” to help SMBs understand the implications and how they impact your business overall. It includes information for UK businesses selling to the EU and EU businesses selling to the UK.
But we want to make sure you understand that the guide is for informational purposes only. You should always consult with tax professionals and experts who focus on importing and exporting to make the right decisions for your business.
This guide will help you understand what support you need and the right questions to ask your expert advisors.
One more important point before we begin—like most SMBs, you’re used to searching online for information to help your business. There’s a lot of information out there on the topic of Brexit and e-commerce. Always be sure to check the date on any content you find. Many companies and experts wrote in-depth pieces before the Brexit deal was announced. Some of them assumed there would be no deal at all. This timing is another reason why you should always consult with expert professionals before implementing anything you read.
For most e-commerce businesses, there are three main areas to consider in today’s post-Brexit world.
- VAT changes and new VAT regulations
- Customs documentation requirements
- Marketing and customer experience
Some businesses may also have to consider factors such as packaging, labelling, and ingredient requirements, but these vary dramatically based on the type of goods. They also require expert input, but we won’t cover them here.
VAT Changes and New VAT Regulations
With the Brexit deal, the UK exited the common VAT regime with the EU. For cross-border e-commerce, this change means that compliance with the requirements for collecting and reporting VAT has become much more complicated.
According to reporting in ITV News, small e-commerce companies are no longer allowed to sell to the EU’s 450 million consumers simply by using their UK VAT number. Those companies who wish to continue to export will have to register for VAT in each EU country where their shoppers reside. They may also need to appoint fiscal representatives in each country.
In the same article, an expert from tax specialist firm Avalara estimates that VAT registration and associated expenses will cost UK e-commerce companies an average of £7,200 per country per year. So, a UK-based e-commerce store with customers in Belgium, France, Germany, Italy, Portugal, and Spain would incur £43,200 in additional costs each year. Moreover, each EU country has unique requirements for registration and compliance.
For items worth £135 or less, only VAT must be paid. Exceptions for goods valued at £15 or less no longer apply. Items worth more than £135 are subject to additional import VAT rules as well as customs duties.
Finally, UK sellers will need to pay close attention to a series of significant reforms to e-commerce VAT obligations within the EU. Some reforms will also apply to non-EU sellers. These changes will come into effect on 1 July 2021.
Avalara has been tracking what’s in the reform package, including simplified reporting tools, removal of exemptions and loopholes, and changes to the parties responsible for supplier obligations and VAT collection. They conclude that “both EU and non-EU sellers will benefit from reduced VAT obligations, and may be able to deregister in some EU states.”
EU-based sellers will also have to comply with new UK rules for VAT on items sent to UK buyers, with the exception of Northern Ireland. According to accounting firm Deloitte, “the VAT treatment of supplies of goods from the EU to Northern Ireland will, in principle, not change as of 1 January 2021.”
EU direct sellers must register and account for VAT with HMRC (Her Majesty’s Revenue and Customs department, responsible for tax collections). Sellers using marketplaces only don’t have to meet this requirement.
For most orders not exceeding £135 in value, supply VAT must be collected and accounted for at the point of sale (i.e., your e-commerce store or any marketplaces through which you sell). This threshold applies to an entire order rather than individual items, which means that two items that cost £100 would exceed the specified value.
For orders over the £135 threshold, import VAT and customs rules apply. Supply VAT shouldn’t be charged at the point of sale. HMRC has published a detailed policy document to explain all changes to VAT treatment of overseas goods. What has changed is that rules that applied only to non-EU sellers of goods into the UK now apply to EU sellers.
Customs Documentation Requirements
The Brexit deal imposes zero tariffs and quotas on trade between the UK and the EU. This is good news in theory, but e-commerce between the UK and the EU will still count as cross-border selling. As a result, complex import/export rules, including duties, will apply.
These customs rules require extensive documentation. Most experts agree that these rules will create slowdowns at the borders, especially in the new deal’s first year. Documentation errors can end up holding goods at customs until the issues are resolved. Goods may even be returned to the shipper.
Before continuing down this path, be aware that goods must originate in the UK and EU to fall within the terms of the free trade agreement. If you’re importing and selling goods from Asia, additional complex rules will apply. “For example, if a British clothing retailer imports Chinese-made textiles, then it would then have to pay a customs charge if it re-exports the items into a member nation of the EU’s single market and customs union,” according to recent reporting in Irish news website, TheJournal.ie.
Even between the UK and the EU, it’s a lot of detail and bureaucracy to handle, beyond the scope of an overview guide, but here are the basics you need to know.
First, you need an EORI (Economic Operator Registration Identification) number in both the UK and EU. An EORI is used to identify your business to customs authorities in your reporting, declarations, and other import/export documentation. The UK Government and the EU Government provide guides to obtaining this number in each jurisdiction.
Second, when shipping goods between the UK and the EU, customs may require import and export declarations depending on whether you, your customer, or an intermediary is considered the “Importer of Record.”
Your best resource for understanding the correct forms and process will often be your shipping provider. If you’re already working with a shipping provider, they provide information, tools, and services to help cross-border shippers. Here are two sample guides from the UK’s Royal Mail and DHL.
If you sell large volumes of merchandise across borders, there may be advantages to using warehousing and fulfillment in the destination location as well.
If this seems intimidating, there’s good news and bad news. The good news: you can use a third party to deal with customs for you entirely instead of taking it on yourself. These third parties can be individual experts or companies such as freight forwarders, customs agents, and fast parcel operators. The bad news: this adds costs because you have to pay their fees on top of customs costs, and their services are in very high demand right now.
Third, and the final customs topic we’ll cover in this guide, you must have correct commodity codes for every product that you’re selling. There are many thousands of such codes; they are very complex and specific to your products’ features and ingredients. Not only that, but there are different numbering systems used in the UK and the EU.
If you get commodity codes wrong, you may pay the wrong duties and end up with a considerable accounting and tax situation to deal with down the road. It’s also possible that goods could be blocked at customs.
As with other aspects of customs, your best bet will likely be to find a qualified professional to handle coding issues on your behalf.
Marketing and Customer Experience
So far in this guide, we’ve focused on a lot of bureaucracy. If you’re like most e-commerce companies, you’d rather think about your customers. Here are some marketing and pricing considerations to keep in mind.
Unfortunately, some shoppers will be scared off by the many stories they have heard about higher costs, longer shipping times, customs hassles, and other inconveniences. There are still things you can do, however. A lot of the keys to continued business after Brexit come down to communication.
The most important thing is to be transparent. Everyone knows the situation is confusing. Shoppers may even assume you can no longer ship to them. You can mitigate this by providing your shoppers with clear, non-technical explanations of how you’ll handle VAT, customs fees, shipping, returns, and other specifics of the purchase process.
You can even make this a bit of a marketing opportunity. For example, communicate proactively how much you value them and your efforts to make it as easy as possible to do business with you, update your advertising, and create social media campaigns about what you’re doing. Although you should also update all of your more detailed terms and conditions, shipping and return policy documents, and similar legal content, don’t just bury the details in the “fine print.”
Your other big decision with customers is around costs. Although one option is to leave them responsible for additional VAT and duties, this creates a negative customer experience. It’s very likely that they won’t shop with you again.
It’s not necessary to frustrate customers this way. Going back to the topic of customs, there are two types of international commercial terms (called “incoterms” by industry specialists).
- Delivered Duty Paid (DDP) means that you take on any import costs for your shopper. No surprise fees for them, but it does mean you’re responsible for filing the associated taxes. You can even use this as a marketing message by making sure shoppers know you’re doing it.
- Delivered at Place (DAP) means you’re only responsible for shipping the product, while your customer has to deal with customs and import costs. More hassle will rarely, if ever, be an appealing scenario for them.
The other place where you can absorb costs of cross-border selling is in price increases. Your shoppers’ willingness to accept higher prices depends on many factors. Brand loyalists may be more willing to accept them because they so strongly prefer you to their other options. Product exclusivity such as design content, unique features, and technology may set you apart in a way that still draws shoppers to shop with you. If your product is a bit more of a commodity that can be replaced by local alternatives, it may be very challenging to pass along higher costs by charging higher prices.
Regardless, an instalment solution such as Splitit can help take the sting out of potential increases. While an extra £50 or €50 on a £500/ €500 purchase might turn some shoppers away, having the ability to list your price as 5 instalments of £110 or €110 softens the psychological impact of the total price. This has always been a big benefit of instalment options, but Brexit has created a new opportunity to use them to your advantage and help manage the way people react to prices.
Conclusion
Soon after the Brexit referendum passed, people started to understand that it would create a lot of complexity, with many new processes affecting commerce and trade. It has been a long and uncertain four-and-a-half years.
While we know the final deal that emerged isn’t ideal for e-commerce businesses, you still can find ways to sell across borders. There’s a lot to consider, but there’s also a lot of information out there, and there are more and more service providers providing help to SMBs.
If you make the strategic decision to continue or pursue e-commerce sales between the UK and the EU, it is possible. In the fast-moving world of global commerce, our hope is that innovative providers will find more and more ways to do it efficiently and cost-effectively.
Note: for the most definitive detail, see the text of The Trade and Cooperation Agreement.