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EU VAT changes – is your eCommerce business ready?

Doing business with Europe has become so expensive and onerous since Brexit that a vast number of UK eCommerce businesses have simply turned off all EU activities. Managing the different VAT thresholds and rates across each EU country has certainly added to the admin burden and cost of doing business – so how much difference will the new Import One Stop Shop (IOSS) make? James Hyde, CEO of James and James Fulfilment explains why businesses need to take urgent steps to ensure they can still trade after July 1st...

Harmonising VAT

As the European Union pushes forward with its plan to change the way VAT is accounted for on cross-border B2C supplies, UK eCommerce businesses need to be aware of the sweeping reforms being introduced on 1 July 2021 by the 27 member states. Designed to make it easier to account for local VAT in the consumer’s country, the new rules are also targeted at cutting loop holes and reducing the substantial value of VAT fraud. 

For UK eCommerce businesses that have wrestled with the need for different VAT numbers – as well as VAT thresholds and rates – in different member states, the creation of the Import One Stop Shop (IOSS) single EU VAT return is broadly welcomed. Allowing businesses shipping goods from their home country to customers across the EU to report all pan-EU sales in one place, the IOSS is an extension of the 2015 Mini One-Stop-Shop (MOSS), which successfully trialled a single EU return for B2C sales of digital, telecoms and broadcast services.

The process is relatively simple – a business simply needs to go online and register for an IOSS number. However, to do so requires an existing VAT number – and if a business does not already have that in place, it will require fiscal representation to acquire the number and currently, this process is taking up to eight weeks.

Reducing Thresholds

The other significant change is the withdrawal of the €22 import VAT exemption on small parcels – something that has been used – intentionally or mistakenly – by companies to avoid VAT in the past.  From July 1st VAT must be charged at the point-of-sale for consignments not exceeding €150.  Companies using the IOSS simply need to ensure VAT is calculated at the point of sale and goods will be automatically passed through customs. However, any company that has overlooked this change and continues to send lower value items into Europe will face a nasty surprise because both VAT and an admin fee will be applied, and the cost will be presented to the end customer.

For those that register in time, the use of the IOSS will create a more efficient process for quick and easy customs clearance – which should reduce delays and avoid unexpected admin fees from both customs and carriers. However, to ensure goods pass smoothly through this new ‘green channel’ UK eCommerce businesses must ensure all commercial invoices include the correct IOSS number. 

Furthermore, much of the burden of compliance to the new EU VAT regulation has been passed on to the carriers, who have only just released their technical specifications, which include electronic invoice formats. Therefore, in addition to ensuring the correct IOSS number has been attained, companies will need to determine how to create invoices in the correct format with the right information to avoid expensive customs delays.

Get Ready

Getting this process right will remove a huge component of the additional costs that have made trade with the EU far less profitable since Brexit. It will avoid the customer experience disaster that occurs when €10 admin fees and unexpected VAT liabilities are imposed on each transaction. The onus is therefore on UK eCommerce businesses to get this right – whether that is attempting to determine the technical expectations of carriers and amending IT solutions in time, or finding a fulfilment partner that can automate the process, ensuring all commercial invoices are created in the correct format, with the correct data.

And time is against UK business. With just a matter of weeks before the changes are made – it is those companies ready on July 1st that will be best placed to exploit the lower cost of sale, rapidly reinvigorating EU expansion plans that have been side-lined since January, to steal a march on the competition.

OPINION: UK Business ill-prepared for post-Brexit Customs Complexity

2020 was meant to be the year of ‘Brexit Preparation’. When the UK left the EU on January 1st2020, firms involved in trade with the EU were set to spend 12 months on robust planning, maximising the 12 month Brexit transition period to understand the new trade and customs requirements. The transition period provided time to put in place the systems and expertise required to manage trade and the customs declarations that will be required with the EU. 

Since March, however, Covid-19 has wrought unprecedented change throughout every supplychain – and many firms felt they had no option but to shelve Brexit planning, and in many cases also use cash and stock initially reserved for Brexit-related disruption, simply to survive. With the deadline fast approaching, however, and the option of a ‘no-deal’ Brexit on the table, the lack of preparedness is beginning to raise concerns. 

As Andrew Tavener, Head of Marketing at  Descartes, argues, UK businesses are largely ill-prepared for the customs complexity post-Brexit. Companies need to take action now, or potentially risk supply chain disruption at a level far greater than that experienced during the onset of Covid-19.

Brexit readiness assessed

During July 2020, Descartes commissioned independent research to ascertain supply chainmanagers’ general expectations around the impact of Brexit. The findings were stark:

  • Two thirds of businesses have had their Brexit preparations disrupted by COVID-19.
  • Less than a quarter (23%) have high confidence in their ability to cope with the extra administrative burden of Brexit.
  • Two thirds (67%) of large firms are very or extremely concerned about longer delays in their supply chain impacting the business post-Brexit.
  • Fewer than one in five (18%) of UK businesses are prepared for a ‘no deal’ Brexit.
  • Almost three quarters (72%) are concerned about the customs brokerage market’s capacity post-Brexit.
  • Two fifths (40%) are concerned about customs declarations impacting their business post-Brexit.

With just a few months until the the end of the Brexit transition period, the lack of certainty surrounding the deal still under discussion between the EU and UK is undermining business certainty. Just over half (52%) think a UK-EU trade deal is unlikely to be achieved in 2020 and only one in ten (10%) supply chain managers claim to have total certainty regarding the impact of Brexit on their business. Furthermore, despite the consensus regarding the likelihood of a ‘no deal’ Brexit, fewer than one in five (18%) are prepared for a ‘no deal’ exit from the EU.

Delays to the supply chain (45%) are the biggest concern regarding the impact of Brexit on cross border trade. However, the larger the organisation, the greater the concern regarding supplychain delays: 56% of supply chain managers in firms with over 1,000 employees are worried about delays to the supply chain. The impact of such delays also raises serious concerns: two thirds (67%) of larger firms are very or extremely concerned about longer delays in their supplychain. Over two thirds (68%) of supply chain managers within healthcare are also concerned about supply chain delays. Tariff payments (40%) and customs declarations (40%) are the next highest concerns. 

These findings underline a key fact: those organisations and supply chain managers with existing experience of customs declarations are far more worried about the implications of Brexit on the business than those who have yet to discover the complexity of customs processes. Significantly, with consumer behaviour having fundamentally changed during COVID-19, this inexperience is likely to catch out many smaller sole traders who have moved to an ecommerce model and rely on trade with the EU during the pandemic.

Understanding Customs Complexity

For any organisation hoping for a last-minute reprieve, customs declarations will be required regardless of whether the UK strikes a free trade deal with the EU. Even companies that opt – and are allowed – to defer import customs declarations for six months must still maintain detailed records of goods brought in. Furthermore, many smaller organisations appear unaware that Brexit affects every import or export with the EU: it will no longer be possible to simply load up and drive to another country to deliver and sell goods without paperwork, or for e-commerce traders to simply post goods to a consumer in Paris or Cologne as if it were Birmingham or Manchester. Customs declarations will be mandatory.

There are essentially two approaches that companies can consider: complete declarations in-house or use an intermediary – a customs broker or freight forwarder – to handle the process.  Relying on the latter option, however, could be difficult given the expected huge increase in demand due to Brexit. Government figures suggest that British companies trading with Europe will have to fill in an extra 215 million customs declarations a year post Brexit – with a potential cost to businesses of around £7bn a year. There are simply not enough third-party providers to support this huge increase in demand – a fact clearly recognised, with our research confirming almost three quarters (72%) are concerned about the customs brokerage market capacity after Brexit.

Yet when less than a quarter (23%) of companies have confidence in their ability to cope with the extra administration associated with Brexit, and 40% are concerned about customs declarations impacting their business post-Brexit, the options if customs brokers are not available are limited.

It is possible to file directly with HMRC – but how confident is the business in its ability to check the classification and valuation of goods to ensure the right commodity codes are used? Determine the need for licences for restricted or hazardous goods? Prepare and submit the correct documents to ensure there are no delays at the border? And what about taking advantage of customs authorisations, including Inward Processing, Customs Warehousing, Transit and Customs Freight Special Procedures that could simplify the paperwork requirements for importers trading heavily with the EU or moving goods through multiple territories? Any firm wanting to use these procedures will need to be authorised by HMRC. What about the option of a six-month deferment for import declarations, which will require the business to open a deferment account with UK customs?

Taking Control

Any company deciding to self-file should consider a software system that can streamline the process, from data consistency to the use of templates to speed up the creation of documents for routine product import. The Government’s Custom Grant Scheme provides support for businesses needing to invest in both technology and training. Combining a Software as a Service (SaaS) customs solution that ensures all regulatory changes are automatically updated and available, with staff training to achieve in-house expertise, provides a strong foundation not only for handling the complexities of post business activity but also future business development.

One of the key aspects of self-filing is the ability to immediately understand and manage landed costs. Import and export duties and tariffs create a new cost model that businesses need to understand rapidly. With different tariffs applied based on a range of factors, from place of origin to method to transport, the ability to monitor landed costs will provide companies with the chance both to manage the new cost models and take strategic sourcing decisions. With over a third of firms confirming they have or will by the end of 2020 looked for new sources of goods (35%) and imported goods early to protect supply chains (34%), factoring in the landed costs will be key to creating the correct customer pricing model and retaining margin where possible.

For ecommerce businesses, immediate insight into landed costs will be essential to provide customers with accurate pricing. No business wants to risk shipping individual items cross border, all the way to the customer’s door, only for the item to be refused when the courier demands the additional £20 customs duty payment, for example. Being able to integrate customs solutions into the ecommerce platform will support accurate real time pricing information.

Software can also support firms that decide to use customs authorisations, including Inward Processing, Customs Warehousing, Transit and Customs Freight Special Procedures; as well as providing the detailed record keeping required for companies that have deferred import customs declarations for up to six months. Essentially, the software will create the declarations without submitting them, providing a detailed declaration report to the business to deliver essential insight and take control over the new import/export cost model post the Brexit transition period.

Conclusion – Preparing for Change

Growing numbers of organisations are beginning to recognise the implications of the Covid-19 pandemic extend far beyond the extraordinary supply chain challenges faced over the past few months: consumer behaviour has changed fundamentally. Retailers estimate the shift from bricks & mortar to ecommerce has massively accelerated, achieving a change within three months that was previously expected to take at least three years. While companies may have recognised the increase in customs declarations that will be required as a result of Brexit, the shift towards ecommerce and direct to consumer delivery will not only increase those numbers, it is also likely to catch a number of the smaller sole traders by surprise.

With 30% of organisations experiencing major uncertainty with regards to the impact of Brexit on the business and its supply chain, and the end of the Brexit transition period fast approaching, the onus is on business to take action today, and make the changes that can enable firms to become 100% confident with regards to customs declarations from January 1st 2021.

UK firms to ‘expand into overseas markets’ in post-Brexit landscape

Three in four UK businesses (78%) are putting plans in place to adapt for growth post-Brexit, with 18% of firms planning to expand into new overseas markets and one in seven putting plans in place to move their headquarters to an EU destination.

That’s according to new research commissioned by ThoughtWorks which surveyed 1,026 businesses and discovered that there were almost as many businesses planning to expand abroad (18%) as there were enterprises focusing more on the domestic market (23%).

The difference came down to technology – Businesses making the most of their tech assets were those most likely to be looking at overseas expansion (23%). Businesses that were improving their use of technology, but were some way behind the market leaders, were most likely to focus on attempting to grow their market in the UK (25%).

ThoughtWorks found that the attitudes of business leaders towards securing growth after Brexit varied city-by-city around the UK. It says that while the Brexit political debate has largely been associated with London and Edinburgh, from a business perspective the research suggests it impacts various cities quite differently:-

  • London businesses were the most likely to seek business partnerships in EU countries (27%) and to digitise their back office and legacy systems in order to become more efficient (21%). Businesses in the capital were also most likely to employ more staff that spoke foreign languages (20%).
  • Birmingham businesses were most likely to invest in digital transformation programmes (21%) as part of a plan to secure growth after the UK leaves the EU.
  • Leeds business decision makers were most likely to be looking at reducing their cost base and staff numbers (26%).
  • Glasgow was the city where businesses were most likely to say they would invest more resources into AI and machine learning (18%).
  • Liverpool businesses were most likely to prioritise the diversification of their business across more product lines and channels (30%).
  • In Manchester and Newcastle, business leaders were most likely to say they would focus on growing the domestic market (30% and 34% respectively). Further, Newcastle businesses were most likely to plan a move into new overseas markets (34%) and seek new partnerships in EU European countries (29%).
  • Bristol was the city where businesses were most likely to consider moving their head office to an EU country (20%).

Luke Vinogradov, Digital Transformation Principal at ThoughtWorks, said: “For years, people have speculated about the impact of Brexit. Since Friday of last week the speculation has ended as Britain sets out on a new journey. For the business community there will be uncertainty and those that turn it to their advantage will be the agile enterprises that anticipate change and adapt quickly. Our research suggests technology will be key. Those enterprises that fully use technology to achieve competitive advantage are already making plans to expand, to innovate and to grow.

“New ways of working can align your whole business around customer value; data can help you to build engagement and advantage; platform thinking and a test-and-learn approach will maximise the impact of your investments; and a delivery mindset will help you cut through the complexity and get things done. All of these digital capabilities can help businesses to modernise, change and grow – and get in shape to seize the opportunities that the post-Brexit era may present.”