World of Tax #2 - Do you need to charge VAT to your UK customers?

 Are you selling products cross-border, but confused about your tax responsibilities in each country? In this episode: tax expert, and Head of Indirect Tax at Reach, Grigory Schichkho, gives us the low-down on what you need to know about calculating and charging taxes to UK consumers. 

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Leo Tucker: 00:15

Welcome to the World of Tax miniseries. I'm your host, Leo Tucker, and I'm joined again today by my favorite guest, Grigory Schichkho. Grigory, welcome.

Grigory Schichkho: 00:22

Hi, Leo, and hi, everyone.

Leo Tucker: 00:25

A couple of weeks ago, we put up a poll on LinkedIn, and the question was, if you are a European merchant selling physical goods into the UK, do you have to charge and collect VAT? And we were surprised at how few got the question right. So I think it's a good time to talk about VAT requirements, tax collection requirements, registration requirements for selling physical goods into the UK. Let's start talking about reporting requirements. So when is tax collection required on physical goods being sold into the UK?

Leo Tucker: 01:05

Let's start there. You're a foreign foreign merchant selling into the UK physical goods.

Grigory Schichkho: 01:10

Yep. So let me step back, a little bit, Leo, before I answer your question. So, it's especially relevant to ecommerce merchants based in the European Union because we are living in 2024. But, nevertheless, a lot of people, they used to account the UK as part of the European Union. Right?

Grigory Schichkho: 01:32

And they they used to, like, they it was much I would say, from the tax point of view, it was much easier for them to, send goods to consumers in the UK than UK was part of the single market of the with other European Union countries. All of these changed, in 2021. So starting from 2021, when you, as a foreign ecommerce merchant, sell physical goods directly to consumers in the UK, You must calculate and collect VAT at the point of sale if the value of the consignment or, in simple terms, of the parcel is below £135. Right?

Grigory Schichkho: 02:26

So £135 is the threshold, for this. So we are talking here not about, like, some registration threshold based on the volume of sales, but we are talking about the threshold for, goods that you sell.

Leo Tucker: 02:45

So the per item cost. So if I am a European business and I'm selling an item for a £100 into the UK, then I'm required to collect tax on that is what you're saying.

Grigory Schichkho: 02:56

It's not on a per item, basis. It's actually on per consignment best base, basis, sir. What I'm trying to say is that if you sell just one item and it cost, as you mentioned, £100, yes, you need to calculate and collect UK VAT. If you sell, I'm making this up, free items, like, let's make it visual, 3 t shots, £20 each, which total to £60, you need to collect UK VAT. So it's on the consignment level.

Leo Tucker: 03:33

Right. So we're talking about the cart here. So on each individual purchase so every time I run my credit card through as a customer, as long as that amount is under a £135, I owe sales tax, and the merchant should be collecting sales tax from me, the customer. Is that right?

Grigory Schichkho: 03:49

That's right. But it's a little bit more actually complicated in terms what you need to consider than your compare your order against this, threshold. So, in this official language, it's called intrinsic value of this parcel. By intrinsic value, it means that, you need to consider only the cost of the goods. So you should ignore shipping and insurance, if any.

Grigory Schichkho: 04:18

Right? So say I'm giving you another example. Say the order is £120 +19.9 9, shipping cost. Right? The amount would be the total amount of the order, they they would would be above the threshold.

Grigory Schichkho: 04:36

Right? It would be, like, 1 20 +1999. It would be 1, 3999. But, for this VAT calculation, so that for this compliance purposes, you need to take into account only the value of the goods.

Leo Tucker: 04:51

Right. So we don't include shipping. We don't include things like, insurance. So just other ancillary. We're just talking about the value of the goods because that's what the tax is being levied on.

Leo Tucker: 05:00

Correct?

Grigory Schichkho: 05:01

Not exactly. We take into account the value of the goods to see whether our whether the order is below or above the threshold. But then we calculate VAT. That's the second step. When we calculate VAT, we actually need to take into account everything.

Grigory Schichkho: 05:19

So we add bags. So we have the cost of the goods. We have shipping. We have insurance. And on the total amount, we calculate VAT.

Grigory Schichkho: 05:26

This is how it works. This is a little bit complicated. You see?

Leo Tucker: 05:29

Yeah. Okay. I see. I see what you're saying. So it's all so the the threshold is calculated on the value of the cart, but the actual tax that's being charged to the customer is based on the entirety, including shipping, including insurance.

Grigory Schichkho: 05:42

That's correct.

Leo Tucker: 05:44

Okay. Yeah. I understand. So I'm assuming I'm assuming this applies in all circumstances. Do, marketplaces get any kind of break on this?

Leo Tucker: 05:54

Are there any exceptions to this that that should be noted?

Grigory Schichkho: 05:58

It's a $1,000,000 questions. If you as a ecommerce retailer actually sell your goods, via an online marketplace, for example, Etsy or someone else, right, then the responsibility to calculate and collect VAT for more value goods, shifts to the marketplace.

Leo Tucker: 06:24

So they become they become liable for the the for the tax liability.

Grigory Schichkho: 06:29

That's correct. So it's called dim supplier rule. So online marketplaces, become liable to calculate and collect taxes. But if it's a direct, sale to consumers in the UK, then, the foreign, merchant is caught.

Leo Tucker: 06:50

Okay. That's good to know. So, I mean, I guess the obvious question is so since the UK is no longer in the European Union, the EU doesn't get any special EU merchants don't get any special treatment there. They're treated just like the rest of the world.

Grigory Schichkho: 07:05

That's that's true. From the UK point of view, it's not it doesn't matter where the merchant is located, whether, let's say, an EU merchant or US merchant, they, all of those merchants will have to, go collect and collect. UK VAT for lower weighted goods.

Leo Tucker: 07:22

Gregory, thanks for joining me to talk about UK taxes today. We'll look forward to talking about our next episodes, which should be coming up shortly. For the world of tax, I'm Leo Tucker. Thanks a bunch. If you like this content, go ahead and like and subscribe.

Leo Tucker: 07:35

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