From 1 January 2021, online marketplaces are to collect VAT (value added tax) for orders not exceeding £135. This change of policy is a direct impact of Brexit. The implications are for online marketplace platforms, sellers and consumers. The new regulation is making online marketplaces liable for VAT payments and reporting for sales of goods sold through the marketplace.
Goods sold to the UK by a foreign seller and facilitated by a marketplace will fall under the VAT regime.
The UK government has issued a policy paper and guidance paper for sellers. Also read Avalara’s Brexit VAT & Customers checklist. The article includes all elements of the Brexit Trade and Cooperation agreement in relation to the VAT regime. This blog posts intends to give an explanation of what it means from an online marketplace owner standpoint. I will cover the seller point of view in a separate post.
New VAT responsibilities for Online Marketplaces
To set the scene, the new policy impacts goods:
- with a value up to £135 (goods with a value above that value remain subject to existing customs)
- delivered to the UK from an inventory stored outside of the UK
- of any value from an inventory stored in the UK (not relevant if the seller is established in the UK or not)
Marketplaces carry additional responsibilities since 1 January 2021. These are:
- Marketplaces have to register for VAT in the UK, if not already done so
- Assess the nature of the goods. Assign HS codes or classifications codes. Determine the correct VAT rate based on the HS codes
- Keep a ledger of goods sold through the marketplace
What does it mean for Online Marketplaces? Marketplaces have to collect VAT at checkout and remitted directly to HMRC (HM Revenue and Customs).
VAT registration in the UK
If you already sell on Amazon or eBay, you already have been exposed to this topic. What changes with the lift of the £135 threshold is that many goods sold are falling under this category. So the sheer number of orders that the marketplace will need to be liable for is mathematically going to the roof. In addition, a key element of a new regulation to be in effect from July 2021 is that the marketplace will become the “deemed supplier” (One-Stop-Shop EU VAT reform, read the Modernising VAT for cross-border e-commerce article for more insights pon this topic). One of the key elements of the “deemed supplier” concept is that the marketplace charges payment on behalf of the seller. This means that the notion of Merchant of Record (MOR) changes as well. More on the Merchant of Record in a separate post.
A VAT-registered marketplace can reclaim import VAT, in accordance with the VAT deduction procedures. For goods sold within the UK by a UK seller, the adequate VAT applies to you as “deemed supplier”
It also means that you can manage a VAT Reverse Charge process if you have companies in multiple countries.
Lastly, anticipating B2B sales is a smart move. As online marketplace, registering for VAT helps account for B2B transactions. The standard VAT rules apply for B2B transactions if your buyer is a UK VAT registered business.
Take-away: VAT register your marketplace in the UK if you already are selling in the UK or plan to do so.
Product classifications and HS codes
Tariff-code changes in the United Kingdom are in effect since 1 January 2021. Codes identify products that move across international borders. Merchants used them to declare goods and calculate duties. A common practice is to use HS Codes (Harmonized System) created by the WCO (World Customs Organisation). It contains more than 5’000 commodity groups and more than 200’000 commodities. The code is a six-digit HS code at a minimum that is the same across 200 countries adhering to the WCO rules. Many countries use a 10-digit HS code that includes 4 sections: chapter (2 digits), heading (2 digits), sub-heading (2-digits) and extra digits (4 digits).
Example: commodity group II is vegetable products. Cereals are Chapter 10, Rice is Heading 10.06 and wholly milled rice is sub-heading 1006.30.
The UK used the EU integrated Tariff of the European Union system as a starting point. TARIC is the acronym of that system, more information here. They had to create their own system to show that they are not in the EU anymore (sigh).
TARIC integrates the standard six-digit HS codes with a two-digit CN heading (Combined Nomenclature), then a two-digit country code (using the 4 extra digits made available by the WCO. As they UK has left the EU Customs Union, goods shipped between the UK and the EU member states need to have that 10-digit code to be able to clear customs in an efficient way; and avoid additional costs at the borders.
Take-away: assign 10-digit EU TARIC codes to all your marketplace products sold in the UK.
Marketplace Ledger of goods sold
Let’s start with the boring part. The new policy states that marketplaces will be required to “keep electronic records of their sales for a period of 6 years and to provide records electronically to HMRC on request“. This includes goods sold in a direct sales model (marketplacesells directly to customers). Also, it includes goods sold through sellers (or 3rd-party sellers). To be concrete, marketplaces need to store the full records of an order, i.e. the VAT invoice, for 6 years.
The responsibility of an marketplace is to store order information which includes product information (and HS codes). This is typically achieved in a system of record like an ERP. However, in the pre-2021 marketplace model while acting as a middle man, online marketplaces ran with a commission scheme with sellers (e.g. 12% commission on a specific category). The marketplace did not need legally need to store all details of an order, they only had to store the commission aspect of the transaction.
The impact is that the Ecommerce Platform or Marketplace Platform depending on your marketplace model must store all information on a marketplace ledger. The challenge with this is that marketplace products that you do not own and hence have a low control on their information will need to be managed more closely. In other words, as marketplace, your internal quality process that you use for your own products is to include marketplace products. Implementing new fields like HS codes is the first step. More importantly, define mandatory fields in your marketplace PIM (product information management) to store this information. Your marketplace ledger (or ecommerce ledger) must store the same level of information for marketplace products than for your own products. It acts as system of record towards HRMC if you also store a PDF copy of the VAT invoice (this is at least my personal advice to you).
The new UK VAT regime took effect 1 January 2021 for goods under £135. Additional responsibilities conferred to marketplaces are to collect VAT at checkout. In addition, assign a product code like HS code. Lastly, keep a ledger of good sold. It is a complex topic. Furthermore, it is even more complex with topics like MOSS and the nexus of marketplaces. I will cover these topics in separate posts.
If you’re interested about how marketplaces fit into a broader customer experience topic, read my other posts about customer experience or the impact of Brexit and Amazon FBA.
Hope you enjoyed reading. Stay well and safe!
Read other articles about entrepreneurship, ecommerce, marketplaces and technology.
PS: read this article on LinkedIn.
