It was on December 31, 2020, when the UK’s transition period since leaving the European Union came to an end. Having exited the EU’s VAT system and customs zone, this was the moment businesses faced having to adapt to new border trading relationships.
With someone having to now pay import VAT on goods entering the bloc – either the consumer or the seller – the process became more complicated and confused. Many ecommerce companies were still tied to older methods of reporting and navigating this, such as DAP/DDP.
Since then, the EU has introduced a suite of VAT reforms, beginning on 1 July 2021. This included the creation of the Import One Stop Shop (IOSS) scheme, designed to simplify the process of registering for, and paying VAT, when non-EU-based businesses sold into the EU.
Those who have adapted successfully are reaping the rewards, including improvements in customer services from a far smoother export process and the ability to maximise European sales
According to an Avalara study, commissioned in conjunction with the Centre for Economics and Business Research (CEBR), these changes have been positive; 94% of UK businesses saw a rise in positive customer feedback thanks to a simpler import process for export sales to EU consumers.
As well as looking at the first year post-reform, the study, carried out by CEBR, also examined the first six months before the reforms came in. CEBR spoke to 250 business decision-makers in UK-based organisations that export to the EU. CEBR paid specific attention to three industries: manufacturing, retail, and software & digital services.
One major issue it identified was how nearly a quarter (23%) of the firms questioned remained unaware of the IOSS scheme and its positive benefits – and it discovered how four in 10 (38%) of UK businesses were yet to register for IOSS.
Failing to take advantage of IOSS meant missing out on the tax simplification it offered, as well as the increased revenues it delivered. Only a fifth believed it was not as efficient as their previous methods.
Smoothing the sales processes
Just over a year ago, three key questions on exporters’ minds were: “What does this mean for me?”, “how can I continue to sell to the EU?” and “what do I need to do to stay compliant?”
Those who have since adapted successfully are reaping the rewards, including improvements in customer services from a far smoother export process and the ability to maximise European sales by selling to consumers in every EU country.
It is true that 93% of those UK businesses we surveyed noted how the transition harmed their operations to some extent. But this was due to grappling with applying for IOSS registration and understanding the impact of the changes.
Many had found their time spent on tax administration increased for a short while post-IOSS introduction; this was soon outweighed by positive outcomes. Eight in 10 (79%) of those contributing to our research believed the introduction of IOSS simplified the export of low-value goods to the EU.
For those still working to the old methods, or still unaware of IOSS, it must be a business imperative to transition. There are many reasons why it is crucial for any exporter or ecommerce business looking to sell into the EU:
- Reduced confusion for customers at checkout
- No extra costs or surprises for customers, e.g. a demand for VAT in their country from a freight agent or customs
- Faster delivery due to streamlining of administrative complexity
- No need to register for VAT in multiple countries, just one return to file
- Taxes paid and evidenced at checkout meaning goods are less likely to get held up at customs
- No duties paid; customs duty not levied on consignment of goods under €150, the same threshold for IOSS
Ultimately, IOSS prevents the customer having to pay anything at the point goods are imported. Half of UK businesses said buyers are giving positive feedback on this lack of extra cost.
Reducing compliance burdens
One major finding from Avalara and Cebr’s research is how an additional £5.2bn from exports could have been realised had the EU VAT reform come in six months earlier. This would equate to a 10.8% increase in revenues.
But while financially it has paid dividends – revenues increased by 4.2% due to the July 2021 changes (vs Q1/Q2 2020) – cross-border tax complexity still stifles growth. The report found this is costing UK businesses an average of 16% in revenue loss from EU exports a year representing £47.6bn that could have been available to the UK economy.
The research predicts the investment loss due to cross-border tax complexity is expected to result in a further £16.1bn of value lost to the UK by 2026.
It is worrying to see how post-Brexit complexity has led to three in five UK exporters looking to reverse plans to sell in some European countries; they fear fines and compliance issues. That fear is hurting economic growth as many UK businesses simply “turned off” sales to the EU and blocked sales at checkout.
Two thirds (64%) questioned agreed that staying compliant with tax obligations and regulations was the most stressful thing about running their business. This anxiety stems from the weight of compliance burdens and the realities of sweeping EU tax reforms on sales from outside the bloc. A third (32%), who are currently exporting to the EU, planned to exit at least one market.
However, there are some positive signs for future European growth opportunities; nearly three quarters (72%) had plans to expand into at least one more EU market.
To achieve this, businesses do have routes for greater support and clarity to understand what regulators are asking of them. IOSS is just one way to invest in digitisation to take more administrative and compliance burden away.
At Avalara, we help businesses of all sizes to get tax compliance right, in partnership with leading ERP, accounting, ecommerce, and other financial management system providers. We deliver cloud-based compliance solutions for various transaction taxes, including sales and use, VAT, GST, excise, communications, lodging, and other indirect tax types, as well as providing e-invoicing, which is the future direction of tax compliance globally.
Working with a trusted partner will relieve the administrative burden and allow leaders to focus on what matters: unlocking benefits to drive growth and expansion abroad, especially at a time of much economic turbulence globally, and when growth in the UK is so sorely needed.
To find out more about how businesses can overcome their compliance challenges to unlock cross-border growth, go to avalara.com
To download the full Cebr report, go to avalara.com/eu
Promoted by Avalara
It was on December 31, 2020, when the UK’s transition period since leaving the European Union came to an end. Having exited the EU’s VAT system and customs zone, this was the moment businesses faced having to adapt to new border trading relationships.
With someone having to now pay import VAT on goods entering the bloc – either the consumer or the seller – the process became more complicated and confused. Many ecommerce companies were still tied to older methods of reporting and navigating this, such as DAP/DDP.
Since then, the EU has introduced a suite of VAT reforms, beginning on 1 July 2021. This included the creation of the Import One Stop Shop (IOSS) scheme, designed to simplify the process of registering for, and paying VAT, when non-EU-based businesses sold into the EU.
