This post was originally published in November 2020 and has since been updated for accuracy.
In what might be the understatement of the decade, Brexit, the United Kingdom’s Jan. 31, 2020, departure from the European Union, has been a long time coming. Since 52% of U.K. citizens voted to leave the EU in June 2016, it’s been four years of ambiguity compounded by bureaucracy and exacerbated by an unprecedented global pandemic.
So perhaps it’s not surprising that even back in June 2020, government data indicated that as many as 61% of British businesses hadn’t made any preparations—at all—for leaving the EU.
Even six months later, with only weeks to go until the new policies come into effect, it’s not entirely clear how Brexit will affect ecommerce businesses.
The one thing that’s clear is that regardless of whether your business is based in the U.K., the EU, or elsewhere, sales to and from the U.K. will be subject to new regulations, customs, and duties. The customs border will be reinstated between the EU and Great Britain (England, Wales, and Scotland) which will introduce new VAT rules for goods imported into the U.K.. Northern Ireland will have a dual-status post Brexit, so they will be part of the U.K. customs territory but also part of the EU single market for VAT purposes.
“For ecommerce sellers, Brexit basically means more bureaucracy and more tax,” says Richard Asquith, Avalara’s vice-president of global indirect tax. “With the compliance costs, it’s a real existential challenge, particularly for smaller ecommerce businesses.”
As attempts are made to hammer out a free trade agreement between the U.K. and EU, what trade rules and tariffs look like moving forward still remains somewhat unknown. But here’s what we do know about how Brexit will likely affect ecommerce—and how you can prepare.
How will Brexit affect ecommerce sales?
According to a 2019 report from global ecommerce insights firm Edge by Ascential, the U.K. is the world’s third-largest online retail market and the top market in Europe. Right now, it’s worth an estimated $101 billion—but Brexit may change that, with three main factors at play.
First, if you thought delivery times slowed significantly during the early months of COVID-19, get ready for Brexit. Experts predict that supply chains will struggle during the adjustment period, as sellers, shipping companies, and border agents adjust to new checks, protocols, and customs clearances.
Secondly, the addition of new tariffs on goods will either cost you, your customers, or both—which may make your goods less attractive than a foreign competitor’s. According to a 2019 survey conducted by ResearchAndMarkets.com on the implications of Brexit for ecommerce, customers will refrain from buying internationally if additional costs apply after checkout. On the flip side, these duties and taxes may encourage U.K. consumers to buy locally.
Finally, the third factor is a predicted drop in the value of the pound sterling. While this will make purchasing goods from the U.K. more affordable for consumers, the long shipping timelines and custom duties may outweigh the benefits.
Ultimately, even if one or all three of these predictions doesn’t come to pass, U.K. sellers already have an uphill battle to convince consumers to buy British goods. In a July 2020 survey conducted by delivery management company Whistl, around a quarter of respondents from both the U.K. and EU indicated they believe Brexit means delivery of goods from the U.K. will be slower.
“Our research shows U.K. e-tailers will have to work hard to convince European consumers that U.K. products will continue to be good value and the range of goods will continue to be available,” said Melanie Darvall, director of Whistl’s marketing and communications, in a press release.
When do these changes come into effect?
Currently, ecommerce businesses can operate across borders in the U.K. and EEA thanks to the EU e-Commerce Directive. This allows you to operate anywhere and only comply with the regulations for the country in which you’re established. But when 2020 ends, so does this protection. Starting on New Year’s Day 2021, any online businesses will need to comply with local laws specific to online commerce.
Being prepared now is the only way to avoid stock being blocked at customs, frustrated and unsatisfied customers, and potential fines from U.K. or EU tax authorities.
It’s for this reason that Asquith recommends finding a qualified customs agent and freight forwarder as soon as possible.
How do I get ready for new tax regulations?
If you’re not sure how VAT rules will impact you, speak to a local tax professional.
For goods shipped to the U.K. from outside the U.K., the following changes will take place:
Businesses need to collect VAT on orders shipped to the UK below ￡135. But if your brand is using a platform like an online marketplace to supply imported goods with a value below ￡135 to U.K. customers, the VAT liability will be shifted to the platform.
Brands need to file for and remit VAT to HM Revenue and Customs (HMRC) every quarter. Note: Orders above￡135 will be subject to duties and import VAT.
For goods shipped from the U.K. to the EU between Jan 1., 2021 and June 30, 2021, the following changes will take place:
- Merchants are not required to collect VAT on orders shipped from the U.K. to the EU, provided that the EU customer will import
- Buyers are responsible for paying any applicable import VAT and duties on orders shipping from the U.K. to the EU
- Customs documents are required with all orders being shipped to the EU
Register for VAT in each country you operate in or sell to
At the moment, merchants in EU member countries only need to register for a VAT number in another country if their sales exceed a certain threshold (€100K for Germany, Luxembourg, and the Netherlands; €35K for all other EU states). That’s all about to change. As of 2021, merchants selling across the English Channel will require additional VAT registrations.
For U.K. sellers, this means you may need to VAT register in each country you’re selling to—at least until Jul. 1, 2021 when one-stop-shop rules come into effect.
"Make sure you pick your countries wisely when you're sending goods into Europe because some countries, like Germany, don't have a very good postponed accounting or deverred VAT," said Richard Asquith, VP of Global Indirect Tax at Avalara in a webinar.
For EU and sellers from other countries, if you ship orders or supply goods to the U.K. below￡135, you will need to register our business for a VAT with HM Revenue and Customs. (It’s for this reason—coupled with the threat of new tariffs—that some U.K. sellers are considering the financial benefits and tax implications of moving a portion of inventory to EU warehouses.)
Review your tax obligations in the EU to determine if you need to set up or maintain VAT registrations in EU countries. One thing to keep in mind is that the intra-EU distance selling rules will not apply to goods shipped from the U.K. to the EU as of Jan. 1, 2021. An exception to this rule is that intra-EU rules are applicable to Northern Ireland shipments to the EU.
o start registering for VAT numbers, your best bet is to contact a tax authority in your country of sale or a local tax professional.
Where necessary, appoint a fiscal representative
You won’t just need a VAT number for the countries you’re selling to—if you’re a U.K. seller, you’ll likely also need to designate local fiscal representatives.
If you already sell to Norway, Australia, Japan, or South Korea, you’re probably familiar with this system. Essentially, a fiscal representative is a local counterpart—often a lawyer or accountant—who is responsible for your tax reporting and payment. Although this has yet to be set in stone, it’s predicted that the majority of EU member countries (19 out of 27) will require that you have a local VAT representative. However, some experts predict that requirements will be lower for ecommerce sellers.
Failure to appoint a fiscal representative may risk incurring fines, but be prepared to pony up—these representatives often demand high fees, as they’ll be held liable if you’re not tax-compliant. They’ll also require a bank guarantee or cash deposit.
Adjust your tax settings in Shopify
If a free trade agreement isn’t reached by the end of the year, the U.K. will trade with the EU on World Trade Organization rules.
If you’re a seller from outside the U.K., you can already get an idea of what types of tariffs to expect from reading the U.K. Global Tariffs guide. If you’re a U.K. seller, they are likely to be subject to the WTO’s favored nation rates, which may be varied as a trade deal is struck.
For those who have registration-based tax enabled, the tax rates will automatically be updated by Shopify. Review your tax settings and add U.K. or EU VAT ID number wherever required. For merchants on Shopify Plus, we’ve produced a guide for how you can add the VAT number to your sales and the additional changes you need to make.
Here’s what you need to know about how VAT affects your Shopify settings:
Registration-based tax settings: If you use registration-based tax settings, then your existing registrations will be updated automatically. New registrations won't be automatically added and you won't be warned if you need registrations in other countries.
Legacy tax settings: If you haven't yet migrated to registration-based tax settings, then your existing tax settings will not be updated. To update your settings, use registration-based tax settings or update your tax rates manually.
Tax services: If you use Avalara to manage your tax, then your tax settings will be updated there. If you have questions about the details, then contact Avalara's support team. (If you don’t yet use Avalara, here are some instructions for setting up Avalara Sales Tax Calculation within Shopify Plus.) Alternately, your best resource for information on what’s changing will be local tax professionals. And, if you’re based in the U.K., be sure to visit GOV.UK for its Brexit preparation guide.
What do I need to do to prepare for new customs regulations?
Apply for a U.K. and EU EORI number to clear goods
Up until now, you’ve likely been using one number for U.K. imports and exports, but as of Jan. 1, you’ll likely need a separate U.K. and EU Economic Registration and Identification (EORI) number. Used on customs declarations, an EORI number uniquely identifies the exporter in customs procedures and documentation.
Update customs documents for new customs compliance
Once you’ve got your new EORI code, you’ll need to add it to your customs documents. You’ll need to declare the import VAT liability when you clear goods, which ensures customs agents know you’re taking care of the VAT.
However, that’s not the only thing that will need to be modified—customs declarations will need to be modified to include information or data for trade between different countries. Luckily, this will likely be an easy task to complete, as most countries require that declarations include pretty standard data: your EORI number, the amount of VAT collected on the shipment, your VAT registration ID, harmonized code, country of origin, and the total value of each product included in the shipment.
Know your commodity codes
It’s important to know the standardized commodity identification codes (called Harmonized Systems, or HS codes) for each product that you’re selling. Get this wrong and you may pay the wrong tariffs or even have your goods blocked by customs.
There are tens of thousands of codes in existence. Brexit only complicates this further; while the UK uses a standardized six-digit number, the EU uses the same six-digit number plus two additional digits.
To figure out your customs codes now, read through the World Customs Organization’s resources to learn more about the system. You can find your product’s HS code in this searchable database or use Avalara’s classification service.
Then, once you know your product’s HS code, you can add it in the Shopify admin.
What do I need to communicate with my customers?
Update your customer terms and shipping policy
With the taxes you pay shipping products across borders about to increase, you have two real options. You can learn how to calculate them to fairly price products for your consumers. Or, you can have your customer pay them. The latter option may sound easier, but it can leave an unpleasant taste for customers.
“You can choose to push obligations on to your shopper, but you’re not going to get repeat shoppers if you do that,” says Asquith.
Whatever route you take, you’ll need to update your customer terms and conditions, including your shipping policy. These clarify which party is responsible for paying any tariffs or import VAT and ensures your customer is aware of taxes they might be liable for.
The two most popular international commercial terms are as follows:
- Delivered Duty Paid (DDP): This indicates the seller is responsible for any import costs. It keeps your customer from paying unexpected fees but does require you to manage filing the associated taxes. It's a good idea to note in your shipping policy that you are collecting and paying customs duties and import taxes on behalf of your buyers.
- Delivered at Place (DAP): This indicates that the seller is only responsible for shipping the product, while the customer has to absorb any import costs. This will save you from filing taxes but may catch your customer by surprise and lead to delayed or returned shipments. We recommend you update your shipping policy to reflect that your buyers are the importer of record and are responsible for paying any applicable custom duties and import taxes.
Alter your returns and exchanges policy
Customs duties and import taxes won’t just apply to goods you’re selling—they’ll also apply to items returned or exchanged.
That means that if you’re selling clothing or another product category with a high return rate, you could get dinged regardless of whether you’ve opted for DDP or DAP. If you chose to offer DDP, it’s a good idea to clarify whether any collected import taxes and customs duties are refundable. These fees are paid to customs agencies via shipping carriers and while it’s possible to claim a refund, it is not always straightforward.
With this in mind, you’ll also need to clearly articulate to shoppers what your returns and exchange policies are—and highlight if any changes are being made.
Look into new marketing, manufacturing, and labeling standards
A final consideration has to do with health and safety. If your products are developed and made in the U.K., they may need to be re-certified for sale in the EU—and vice versa. You may also be required to modify how you manufacture, label, or even market your goods.
Prepare for EU-region domain withdrawals
If you own a country-specific domain from the EU region (e.g., .fr or .it,) make sure to check with the registry that there will be no conditions for eligibility or steps to maintain ownership. In cases where a domain may be revoked, a new (non-EU-specific) domain would need to be purchased and configured ahead of the withdrawal date (Jan. 1, 2021).
What can I read to learn more?
- GOV.UK’s Brexit Transition guide
- Avalara’s guide to Brexit UK VAT for EU & US ecommerce sellers
- Avalara’s guide to Brexit EU VAT & customs options for UK ecommerce sellers
- The Information Commissioner’s Office (ICO) website
- HM Revenue & Customs’ policy paper: “Changes to VAT treatment of overseas goods sold to customers from 1 January 2021”
- HM Revenue & Customs’ guide: “Retail sector: end of transition period guidance”
- The Department for International Trade's (DIT) country-specific guides for UK businesses who are interested in selling overseas
- Here are a few service providers that can help you get VAT registered and file your VAT returns: