Understanding the UK VAT: How to Prepare as an Ecommerce Business.
This material does not constitute legal advice and is only for general informational purposes. Readers should consult a qualified attorney in the relevant jurisdiction to obtain advice for any particular legal matter.
The United Kingdom has a population of 66.76 million people (as of 2019) and a growing online retail market. Data from Statista shows that the online share of total retail shares in the UK grew to over 26% in 2020. In fact, according to Business Wire, the UK is the third largest online retail market and the largest in Europe.
After four years of uncertainty and confusion, a lot of back and forth and a year-long transition period, Brexit finally occurred on January 1, 2021. The United Kingdom completed its departure from the European Union and is no longer one of the EU states.
What does this mean for your ecommerce store? If you sell goods to customers in the United Kingdom (England, Scotland, Wales and Northern Ireland) from another country (including EU countries), it means quite a bit actually.
Coinciding with Brexit, on January 1, 2021, the government of the United Kingdom implemented changes to the Value-Add Tax (VAT) for goods being shipped into the UK.
If you sell goods to customers in the UK, you may have already taken the necessary steps to adhere to the new VAT rules. However, if you haven’t started, time is of the essence. Read on to learn what changes are happening, what you need to do and how BigCommerce is supporting merchants.
What Is the Value-Add Tax?
A value-add tax is a consumption tax that is added to a product at every stage in its supply chain where value is added.
For example, let’s say you sell a table. The wood is taxed when the raw materials are sold to the factory. When the factory sells the finished table to a wholesaler, it is again taxed. And when the wholesaler sells it to the end customer, it is taxed again.
VAT is usually a percentage of the total cost paid by the consumer of the product. If your store buys wood for $10 and the VAT is 10%, you would pay $11 for the wood. The seller of the wood would then keep the $10 and remit $1 to the government. If you then used the wood to build a table valued at $100, you would charge the customer $110 for the table so that you could pay the $10 VAT to the government.
The United States does not have a VAT, but many countries do have VAT with different rates, including many of the European Union countries. In the UK, the standard rate of VAT (with exceptions for certain goods) has been 20% since 2011.
What Changes Are Occurring with the UK VAT?
With the end of the Brexit transition period finally upon us, many ecommerce merchants are scrambling to make sure they can still serve customers in the UK. Here are the high-level details of the new VAT scheme that the UK government put into effect on January 1, 2021.
For goods imported into the UK in consignments not exceeding £135 in value, VAT is now charged at the point-of-sale (i.e. during checkout) instead of at the point of importation. For the purposes of this policy, a consignment is a group of goods delivered to a person, in this case your customer.