2021 U.K. ecommerce VAT overhaul

HMRC has overhauled the rules of VAT for ecommerce, effective January 1, 2021. This has coincided with the end of the Brexit transition period, which brought separate VAT and customs changes. The new U.K. ecommerce reforms put new VAT calculation and collection obligations on U.K. and overseas sellers and make online marketplaces (OMPs) responsible for the VAT on certain transactions by OMP third-party sellers.

Beginning in 2021, HMRC has implemented separate processes and charging of VAT on imports not exceeding £135 in value and on those above £135 in value.

Imported goods consignments (i.e., multiple goods in a single package) passing through the U.K. customs border and not exceeding £135 (roughly $180 USD at the time of publication) are subject to a new VAT regime. This regime has replaced the previous one in which import VAT collection occurred either at clearance by customs, or by way of customer import payments to delivery agents. 

For these transactions, U.K. and overseas online sellers must charge supply VAT (or “sales VAT”) through their website checkout. Alternatively, if selling goods through a “facilitating” OMP (see OMPs section), the facilitating OMP will charge the VAT in their own name as the deemed supplier. 

The VAT is calculated on sales price. The seller, or OMP, must provide a U.K. VAT invoice that should accompany the consignment through customs. This may be a simplified invoice.

The collected supply VAT is then remitted through a regular U.K. VAT return by the seller or deemed supplier OMP. The goods must be marked or electronically tagged on the customs declarations as “VAT paid at checkout” to avoid double import taxation at the border by customs.

The £135 threshold is based on the intrinsic value of the goods and does not include separate transport or insurance of other import taxes. The £135 threshold is also the U.K. customs exemption threshold.

If the customer is a U.K. VAT-registered business, they may provide the seller or OMP with their VAT number for zero-rating. The U.K. customer will then use the reverse charge mechanism to report the amount of VAT due. Otherwise, sales VAT should be charged.

Excise goods and gifts up to £39 are excluded from this regime.

Imported goods above £135 in value and consignments of multiple goods with a combined intrinsic value above £135 will use the existing import VAT procedures. This means the seller may pay the import VAT (and duties) on clearance, then reclaim the VAT amount if they have a U.K. VAT number. Alternatively, the seller may opt to have their customer pay VAT at customs or to the delivery agent.

If goods are already in the U.K. when the online sale is undertaken, the rules for overseas (non-U.K. resident) sellers have changed.

When a non-U.K. seller sells to a U.K. consumer via a facilitating online marketplace (OMP) and the goods are already in the U.K. prior to the sale, then the OMP becomes the “deemed supplier.” This applies to any value of goods. This does not apply to U.K. resident sellers.

The non-U.K. seller will have already paid import VAT and any duties to clear the goods into the U.K. prior to the sale. Or, they may have paid input VAT if the goods were purchased domestically in the U.K. In both cases, this VAT is reclaimable through a U.K. VAT return.

To affect the deemed supplier transaction, the non-U.K. seller will first sell the goods as a zero-rated supply to the OMP with the right to deduct VAT. This deduction can be declared in the OMP’s U.K. VAT return in Box 6. The OMP will then sell goods to the consumer at regular U.K. VAT rates. B2B transactions are excluded from these new rules, and a U.K. VAT number will serve as evidence of the B2B transaction. Normal U.K. VAT will apply.

Where there is no facilitating OMP in the transaction, the previous rules will apply. The overseas seller must be U.K. VAT-registered and charge U.K. VAT to businesses or consumers.

For goods supplied over the course of implementation, the new rules apply to goods with a “tax point” or “time of supply” on or after January 1, 2021. In the U.K., the time of supply is the earliest of: payment, invoice, or delivery of goods. For example, if payment was made on December 31, 2020, but goods were not dispatched until January 1, 2021, then the time of supply is before the new rules took effect and the new rules would not apply to the transaction.

OMPs are electronic interfaces (website or mobile application), such as marketplaces, platforms, portals, or similar, that facilitate the sale of goods to customers. “Facilitating” means when any of the following conditions are met:

A business that only provides one of the following will not be regarded as an OMP:

As a result of the new obligations for OMPs to charge and collect VAT, they need to collect several pieces of data for correct calculations. These include:

OMPs could potentially be held liable for under-declared VAT on their deemed supplier transactions so the above information must be accurate.

OMPs are expected to take all reasonable steps within their power to ensure that the correct VAT is charged. They are expected to undertake objectively reasonable and proportionate due diligence and consider all the information available to them in determining the correct VAT treatment.

Online marketplaces are required to retain electronic records supporting all transactions for at least six years. This covers both transactions where they have acted as the facilitating deemed supplier and transactions where they have not (and the seller has been responsible for the VAT).