Cutting the complexity of ecommerce sales into the EU

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.

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