UK taxes and Brexit

The Brexit Transition Period ended on December 31, 2020. As a result, effective January 1, 2021, new laws apply to sales between the UK and the EU. This change might make it necessary to review and update your tax processes if you're one of the following:

  • A UK merchant - you're a merchant whose business is located in the United Kingdom.
  • An EU merchant - you're a merchant whose business is located in a European Union member country other than the United Kingdom.
  • A non-EU merchant - you're a merchant whose business is located in a country outside of the UK and the EU.

If you're a UK merchant and you sell to customers in EU member countries, or if you're an EU merchant and you sell to customers in the UK, then there are changes that have implications for several aspects of your business.

VAT

There are new UK VAT laws that came into force on January 1, 2021. These new laws affect both EU and non-EU merchants who sell to UK customers.

EU merchants benefit from simplified procedures that remove the need to register for VAT when they sell to customers in other member states, unless their sales to customers in that member state exceed a certain threshold. Below this threshold, merchants are only required to register for a VAT number in their own regions, or not at all.

After the transition period, UK merchants who sell to EU customers and EU merchants who sell to UK customers can't use these simplified procedures. Merchants who sell between the UK and EU countries might require VAT registrations in additional countries.

Changes and requirements for UK, EU, and non-EU sellers
Merchant location Changes and requirements
United Kingdom The sale of goods from UK merchants to EU customers have become exports (the sending of goods from a country or customs union to outside that country or customs union) rather than dispatches (the sending of goods from one EU member state to another EU member state).

UK merchants might be required to register for VAT, and to account for import VAT in the EU.

VAT registrations might be required across multiple EU member states depending on a number of factors, including (but not limited to) your supply chain, the location of your customers, and where the goods are delivered.
European Union The sale of goods from EU merchants to UK customers have become imports (the receipt of goods into a country or customs union from outside country or customs union) rather than acquisitions (the receipt of goods from one EU member state to another EU member state).

The UK VAT laws that came into force on January 1, 2021 result in new VAT requirements for sales equal to or less than £135.
  • Under the new laws, the sale of goods equal to or less than £135 require you to register for VAT in the UK. In this case, VAT is collected at the point of sale and remitted by the merchant. If you use registration-based taxes and have a UK VAT registration, then VAT will be applied to your sales to customers in the UK.
  • For the sale of goods over £135, you might not be required to collect VAT at the point of sale. In this case, VAT and duties are remitted by the importer. If you use registration-based taxes and have a UK VAT registration, then VAT will not be applied to your sales to customers in the UK. If you choose to, you can charge your customer for VAT and duties at the time of sale, and then provide these funds to the shipper or importer using a shipping label. Alternately, you can send the orders without charging VAT and duties, and your customer will pay extra funds at the time of delivery. Learn more about handling VAT and duties.
Outside of the UK and the EU The new UK VAT laws that came into force on January 1, 2021 apply to the sale of goods from non-EU merchants to UK customers. Non-EU merchants who sell to UK customers might be required to register for VAT in the UK.

The UK VAT laws that came into force on January 1, 2021 result in new VAT requirements for sales equal to or less than £135.
  • If the sale of goods is equal to or less than £135, then you must register for VAT in the UK. In this case, VAT is collected at the point of sale and remitted by the merchant. If you use registration-based taxes and have a UK VAT registration, then VAT will be applied to your sales to customers in the UK.
  • If the sale of goods is over £135, then you might not be required to collect VAT at the point of sale. In this case, VAT and duties are remitted by the importer. If you use registration-based taxes and have a UK VAT registration, then VAT will not be applied to your sales to customers in the UK. If you choose to, you can charge your customer for VAT and duties at the time of sale, and then provide these funds to the shipper or importer using a shipping label. Alternately, you can send the orders without charging VAT and duties, and your customer will pay extra funds at the time of delivery. Learn more about handling VAT and duties.

VAT calculation in Northern Ireland

Under Brexit, Northern Ireland (NI) has adopted a dual status and is considered part of both the EU and the VAT tax regimes.

If you use registration-based tax settings, then VAT is calculated based on the order's origin and its destination. UK VAT applies to orders from within the UK to customers in Northern Ireland. EU VAT applies to orders from within the EU to customers in NI.

VAT application for the UK, the UK, and NI
Order origin Order destination VAT applied at checkout
United Kingdom United Kingdom If you have a UK VAT registration, then UK VAT is charged.
Northern Ireland If you have a UK VAT registration, then UK VAT is charged.
European Union VAT is not charged.
Northern Ireland United Kingdom If you have a UK VAT registration, then UK VAT is charged.
Northern Ireland If you have a UK VAT registration, then UK VAT is charged.
European Union If you have a UK VAT registration, then UK VAT is charged.
European Union United Kingdom VAT charges depend upon on the cost of the order and whether you have a UK VAT registration.
  • If you don't have a UK VAT registration, then VAT is not charged.
  • If you have a UK VAT registration and the order is over £135, then VAT is not charged.
  • If you have a UK VAT registration and the order is equal to or less than £135, then UK VAT is charged.
Northern Ireland If you have an EU VAT registration, then EU VAT is charged.
European Union If you have an EU VAT registration, then EU VAT is charged.

Updating your tax settings

The updates that you need to make depend on how you currently manage your taxes.

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. If you're not sure where you're obliged to register, then contact a local tax professional.

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 tax settings, either update to registration-based tax settings, or update your tax rates manually. Updating to registration-based tax calculations is a permanent change and can't be undone.

Tax services

If you use Avalara to manage your tax, then your tax settings will be updated there. New registrations won't be automatically added. If you're not sure where you're obliged to register, then contact a local tax professional. If you have questions about the details, then contact Avalara's support team.

FAQ

Where can I get more information about Brexit?

The best way to get information about how Brexit affects your business is by contacting a local tax professional. If you're based in the UK, then GOV.UK has a series of notices and a transition guide that you can refer to.

What's a fiscal representative? Do I need one?

Fiscal representatives are local companies or persons that represent you when dealing with the local tax authorities. They're responsible for the management of your tax reporting and, in some cases, VAT debts.

Some EU member states require you to have a local representative if your business is not based in an EU member state and you sell to customers there. After January 1, 2021 UK merchants might be required to appoint a fiscal representative when selling to EU customers. Not all EU member states require a fiscal representative, and requirements might be lower for ecommerce sellers.

If you're not sure whether you need to appoint a fiscal representative in an EU member state, then contact their tax authority or a local tax professional.

Do I need a new EORI number?

It depends. An Economic Operator Registration and Identification Number (EORI) is an ID code that's used to track and register customs authorizations, approvals, and decisions. Previously, one EORI number could be used for tax authorities in both the UK and other EU member states. After January 1, 2021, separate UK and EU EORI numbers will be required.

If you import goods into the EU and you don't have an EORI number, or if you have an EORI number starting with GB that was issued by the UK, then you will need to apply for an EU EORI. If you need an EORI number for an EU member state, then contact their tax authority.

If you import goods into the UK and you don't have an EORI number, or if you have an EORI number issued by another EU member state, then you will need to register for a UK EORI. You can register for a UK EORI number with HM Revenue and Customs.

If you're not sure whether you need a new EORI number, then contact a local tax professional.

I sell digital products, does this affect me?

It depends. The VAT Mini One Stop Shop (MOSS) scheme has two variants. The union scheme is available for businesses established in the EU or with at least one branch in an EU member state. The non-union scheme is available for businesses that are not established in the EU, and do not have any branches in EU member states.

If you currently use the MOSS scheme to sell digital products, then contact your tax authority or a local tax professional to determine how to register for a VAT number.

Do I need to change my terms and conditions?

Probably. After January 1, 2021, import VAT and tariffs might be chargeable on your products when you import or export goods between the UK and EU member states. The two most popular international commercial terms, or incoterms, are:

  • Delivered Duty Paid (DDP). This term indicates that the seller is assuming responsibility for any import costs, such as VAT and duties, that might be payable when goods cross borders. This option keeps your customer from paying unexpected fees or taxes on receipt of the goods, but DDP requires you to manage the import process, and might create VAT registration obligations.
  • Delivered At Place (DAP). Also called delivered duty unpaid (DDU). This term indicates that the seller only takes responsibility for shipping the product, and requires the customer to pay any import costs, such as VAT, duties, and clearing fees. This option might keep you from having to manage the import process, but DAP creates unexpected costs for your customer and can result in delayed or returned shipments.

You're responsible for deciding which incoterms you use, but for most EU member states, you're obligated to ensure that your customer is aware of all charges and taxes they might be liable for.

What's an HS code? How do I add one?

A Harmonized System (HS) code is a way to identify products being shipped internationally, so that taxes and tariffs can be accurately applied to shipments. The World Customs Organization offers resources to learn more about the system, and you can search to find your product's HS code here.

When you know your product's HS code, you can add it in your Shopify admin.

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