The summer of 2021 saw revisions to EU VAT regulations. In particular, these changes affected e-commerce sellers of all sizes and types– from small eBay sellers that sell online as an additional income stream to large-scale international businesses that work in e-commerce full-time.
It appears that many accounting clients and firms were not prepared to handle the EU tax reform and the implications to their profit margins. For example, many sellers were confused about the charges for importing goods from the EU to UK VAT. Many were also not aware of the EU reverse charge VAT. To illustrate, there were 113,700 business closures in the UK in the second quarter of 2022 (April to June). This figure was 8% higher than the figures reported for the second quarter of 2021, before the changes were brought in.
In many cases, advice from a skilled accountant could have helped SME e-commerce brands weather the changes successfully and helped them make the best of their figures and enhance their growth potential.
In this article, we'll examine some of the difficulties business owners have encountered due to the new regulations and provide advice on how accountants can help overcome the various challenges associated with VAT charges.
From 1st July 2021, all UK companies supplying goods to B2C EU customers must make sure that the appropriate VAT rate is disclosed on the sale of the items. VAT charges are based on the EU customer's country and will vary from state to state. This new approach is designed to equalise EU and non-EU-based enterprises. Before this regulation change, many sales were not subject to local taxation, resulting in EU countries missing out on valuable tax revenue.
However, businesses most affected by this change in regulation include e-commerce sellers of goods lower than €150 in value, which in many cases include small business owners and those who use online selling as an alternative revenue stream.
Businesses must also prove they're legally registered to trade in the EU and must update their website to reflect the changes to VAT charges. Companies can sign up for the EU's Import One Stop Shop (IOSS) here. Alternatively, online sellers can sign up in each EU nation where they have domestic customers. For instance if a UK seller does not currently have an establishment within the EU, IOSS enables the collection, reporting, and settlement of VAT by an authorised EU agent working on the seller's behalf. The IOSS system also makes sure that the supplier calculates the correct amount of VAT from the gross payment provided at the time of purchase.
Furthermore, companies must register for VAT in each EU member state, where they conduct B2C sales of goods and services valued at more than €150 per transaction. The changes to VAT rules across the EU involve compliance documentation and additional processes which may have caught some part-time or inexperienced sellers off guard.
Online sellers that were not prepared for the VAT changes may have seen some damage to their reputation and possibly their sales figures. For instance, their customers may not have realised that they would be responsible for paying VAT on their imported goods. The seller may have added it as an additional charge after the initial sale, or the seller may have realised their mistake and paid the cost themselves.
Alternatively, the courier of the imported goods may also charge the correct VAT rate to businesses. This is known as EU reverse charge VAT, which may have also hit the business owner with an unanticipated expense.
For smaller e-commerce sellers, the EU VAT reforms may have raised their business costs to unaffordable levels. In some cases, the changes may have put them off from selling altogether.
Ultimately, the new system requires sellers to decide whether they want to register for VAT in the EU or register for IOSS and have their courier charge the costs back to them. For this, they need to ensure that their site is up and running with the correct charges; they also need to contact their importer with a valid IOSS registration number and ensure that all of their financial statements comply with the new rules.
Guidance from an accountant that's experienced in the e-commerce sector can be hugely beneficial to smaller online sellers. They can recommend automated e-commerce tools that help re-price goods in compliance with updated tax codes.
Additionally, they can recommend bookkeeping tools that can help online sellers keep flawless financial records of transactions.
Business intelligence tools are also becoming very popular and accessible to accountants who advise clients in the e-commerce sector. Accounting and financial analysis features can give business owners real-time insights into cost-cutting measures they can take to improve their KPIs. As an additional service offering, accountants teams can help e-commerce sellers make sense of their financial data and plan the best route to build up profits in an uncertain economy.
Finally, accounting advisors can help their e-commerce clients stay profitable by keeping an eye on wider industry trends and financial news that may impact their valued clients. A simple mail shot could be enough to put clients on the right track and prepare them for any regulatory changes that could affect their company.
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