The United Kingdom has the biggest B2C e-commerce market in Europe. In 2019, UK consumers spent GBP 197.1 billion on online purchases. It is therefore not surprising that many EU online retailers rely on the UK market for their growth and profitability. However, for some EU e-commerce sellers, the cost of doing business in the UK may increase in 2022. The reason for this is that everyone who is registered in the UK for VAT will have to comply with the UK tax obligations called Making Tax Digital (MTD).
What is Making Tax Digital (MTD)?
The MTD requirement came into force in 2019. It has two main components: (1) MTD-compatible third-party software must be used to submit UK VAT returns; and (2) all VAT records must be kept digitally and VAT data must be digitally linked. A digital link means that any data exchange between software applications occur without manual intervention. Manual data transfers (for example, from one Excel spreadsheet to another) are no longer allowed. Similarly, it is not allowed to submit a VAT return by manually entering the numbers into the HMRC portal.
Currently, MTD applies only to businesses with a taxable turnover above the VAT registration threshold (GBP 85,000). However, the UK is planning extend this obligation to all VAT-registered businesses as from April 2022. This means that any EU business that is registered in the UK will need to comply with the MTD obligations, irrespective of the turnover that it generates in the UK. There will be no MTD exemption for non-UK businesses.
Which EU businesses will have to meet the MTD requirements as from 2022?
EU retailers selling goods below GBP 135 to UK consumers will need to comply with the MTD obligations. In January 2021, the UK introduced a new special VAT regime for B2C transactions involving the importation of consignments whose value is less than GBP 135. For these transactions, the seller must be registered for VAT in the UK and charge UK VAT at the time of the sale. The seller must issue an invoice showing the UK VAT and indicate in the customs declaration that VAT has been paid at the checkout to avoid paying import VAT when the goods enter the UK territory.
This means that EU companies selling goods directly to UK consumers must be registered for VAT purposes in the UK if the goods are (1) outside UK at the point of sale (2) imported to the UK in consignments not exceeding GBP 135 in value. There is no VAT registration threshold for businesses established outside the UK so EU sellers are required to register for VAT immediately when they become liable for VAT under these new measures.
If an online marketplace (OMP) is involved in facilitating a B2C sale of goods up to GBP 135, the seller will not have to register for VAT purposes in the UK. The OMP (and not the seller) will have to account for UK VAT and issue an invoice.