Cross-border brands and retailers have been operating on a 'wait and see' basis for the last three years regarding Brexit. Until now, it was unclear exactly how the United Kingdom's (England, Northern Ireland, Scotland, and Wales) departure from the EU was going to roll out. Retailers have been watching developments over the last year with great interest because the United Kingdom (UK) is a top 10 global market for e-commerce. Technically, the first stage of Brexit has already happened, but since February 1, 2020, the UK has been in a transitional period that ends on January 1, 2021. This transition was supposed to give both EU and UK leadership time to work out the details of an official withdrawal agreement, particularly a free trade agreement between the EU and the UK. At the time of this blog post, an agreement still hasn't been ratified on either side.
At Flow, we have been working to stay on top of all of these changes so we can advise our customers and prepare for the new reality. We have broken down the relevant changes into two key phases: short-term, which addresses what happens once we reach the end of the transition period on January 1, 2021, and long-term, much of which is still unfolding between the EU and UK.
The EU was Great Britain's largest trading partner in 2019, according to a trade report from the UK House of Commons. Source: U.K. House of Commons
2020: business as usual
For the rest of 2020, goods imported into the UK from the EU are subject to the standard 20% VAT, and any goods dispatched from the UK to EU member nations are still treated as intra-EU transactions. Under intra-EU transaction regulations, goods are still considered zero-rated for VAT purposes.
Starting January 1, 2021: new duties and taxes to know
However, on January 1, this arrangement will change. Cross-border e-commerce merchants need to understand how this will impact the application of any relevant taxes and duties shipped to and from UK and vice versa.
New tariff schedule for the UK
Once the UK leaves the EU in January, it will not be bound by the EU tariff schedule. Instead, the country will impose their own customs duty rates on imports into the UK, called the UK Global Tariff (UKGT).
You can find more information on the new tariff rates at the HMRC (UK Tax Authority) website.
External border means customs declarations
With the UK border becoming external to the EU, cross-border merchants will need to plan for changes in customs declarations. Goods coming into the UK from the EU will need to follow the same customs declaration protocols as any other outside nation. Adding to the complexity is the delineation between Northern Ireland, which is part of Brexit, and Ireland, which will be staying in the EU. The rules for Northern Ireland haven't been fully established yet, but we know that the movement of business-to-consumer (B2C) goods from Great Britain into Northern Ireland does not require a customs declaration. However, business-to-business (B2B) transactions will require a customs declaration.
UK importers and freight carriers need to know that they have the option to delay import declarations for the period between January 1 and June 30, 2021. Be aware, though, that the VAT will still be accounted for in the month of import unless you have also declared to postpone the import VAT and will be paying through a UK VAT return instead. For retailers who are already using a customs agent, it may not be worth the hassle to delay declarations, since you still have to maintain records for six months.
Incoterms and avoiding unpleasant surprises for the consumer
One aspect of cross-border selling that will become crucial when navigating these changes is incoterms. These are a set of internationally recognized rules that define the responsibilities of sellers and buyers. Incoterms specify responsibility for paying for and managing the shipment, insurance, documentation, customs clearance, and other logistical activities. Making sure that goods are properly documented will be vital when moving them between the UK and the EU. Ensuring that incoterms are correct will avoid confusion on who is responsible for duty and VAT costs. The last thing you want is for your UK customers to be hit with VAT charges they didn't expect.
Changes to import taxes in the UK
Brands and retailers should be ready for changes to e-commerce sales into the UK beginning January 1. The threshold for relevant taxes has been streamlined. All sales equal to and under 135 GBP direct to a consumer by an overseas seller or an online marketplace will now be required to be registered for UK VAT. The online marketplace must ensure UK VAT is charged on applicable UK sales by sellers on its marketplace. This means that UK consumers will be charged a VAT that is collected at the time of sale. These new arrangements will also involve abolishing the Low-Value Consignment Relief (commonly referred to as the "tax de minimis threshold") in place, which means that goods under 15 GBP aren't subject to the tax. Also, many retailers will have potential changes to make to its Terms and Conditions on its e-commerce website, and relevant invoices should be available for HMRC inspection where UK VAT is charged. Finally, brands and retailers need to be aware of the implications of services provided between the UK and the EU under Brexit. There will now be complications and considerations for businesses that deal with both goods and services under the same contract. For example, a company may charge a maintenance fee on goods purchased. There will now be two different VAT regimes to consider under the same invoice, and this was not previously a complication for the UK when trading within the EU.
The United Kingdom and European Union countries will now have an external border between them, requiring customs declarations and all that goes with it.
New UK tax scheme:
- Removal of current tax de minimis of 15 GBP
- For orders between 0 and 135 GBP, merchant pays VAT directly to UK tax authority
- For orders above 135 GBP, it's business as usual and VAT will be paid at the time of import/purchase
- Introduction of new duty rates for UK-bound shipments based on the new UK Global Tariff Schedule
Flow has been closely following all of these changes in real-time, with the primary goal of avoiding any disruption of services for our customers who sell to and from the UK. We are committed to staying in compliance, even as new free trade agreements and tax regulations come into force in 2021. To find out more, get in touch with a Flow cross-border expert today.