Making sense of EU VAT changes

To receive the Vogue Business newsletter, sign up here. For some fashion brands and retailers, new EU regulations to be introduced in July concerning how sales tax, or VAT, is collected will make business much easier. For others, the scope for confusion is ample. The message from tax experts and fashion industry associations alike is simple: act now and act fast. “The absolutely fundamental message is you can't get away from it, you can't complain about it,” says Helen Brocklebank, CEO of Walpole, which represents the British luxury goods industry. “You just have to understand the rules of your unique trading structure and work with it.” High-value luxury purchases are excluded from the new set of rules governing how sales tax is collected on e-commerce imports purchased by EU customers. And that is just one cause for confusion, experts say. From 1 July, companies selling goods from outside the EU valued at €150 or below to European consumers will have to charge import VAT. They can now opt to file a single VAT return via the Import One Stop Shop (IOSS), rather than having to register and pay sales tax in each country where they are selling to customers. That leaves luxury brands having to weigh up whether to utilise the new rules for their lowest value sales while being obliged to stick to the current process for sales above that price. Brands not using the IOSS can use a postal service to charge and collect the VAT for them. Online marketplaces and e-concession stores will also become tax liable for certain purchases, both high-value and low-value. That means, from July onwards, brands fulfilling orders via these marketplaces from countries such as the UK, Switzerland and Russia, will have to work closely with their digital partners to ensure they have all the information required for processing sales correctly. All luxury brands based within the EU will benefit from simplified VAT reporting procedures on all e-commerce sales via an EU-wide One-Stop Shop (OSS) with their regular VAT return. Therefore, those based outside the bloc without the capital or capability to create an EU entity to sell their products will be at an additional competitive disadvantage against European-headquartered brands. Act quickly, prepare for July Experts are urging retailers to quickly work out their obligations to ensure that they are on top of the changes when they come into force. That’s easier said than done. “Many businesses are still working out how the rules impact their various supply chains, so when the first of July comes in, we're expecting a lot of consignments to be either blocked or queried or delayed or incorrectly reported,” says Aruni Mukherjee, director of indirect tax at KPMG UK. The rules are outlined in detail by the European Commission, but implementation will be down to EU member states themselves. Mukherjee says there is a risk that paperwork for some shipments might pass muster in one country but draw the attention of authorities in another. A spokesperson from the European Commission declined to comment directly to Vogue Business on the risk of uneven implementation, pointing to the comprehensive guide to the regulations published online. In response to Brexit, many British retailers now send some goods to customers directly from an EU-registered company from stock held within the EU. However, they still send some products from UK warehouses because of price constraints or supply chain constraints. Brocklebank of Walpole worries that smaller British luxury companies may well struggle with the new rules: “It’s not plain sailing anymore,” she says. “Your price to play is higher.” Traders hoping to benefit from the new VAT scheme for importers will have to know both where every product is likely to be dispatched from as well as where the customer is within the EU. That will enable them to quote the correct rate of VAT at the time of purchase. This information will then require processing, with the correct digital forms completed to ensure VAT is paid correctly. “From a technological point of view, there's a big upgrade needed in everybody's e-commerce systems,” says Richard Asquith, VP of global indirect tax at tax compliance firm Avalara. How the rules help EU companies The rules are a big step forward for companies trading within the EU itself, reducing some of the bureaucratic burdens that have stifled intra-EU e-commerce trading in the past. A key point is that DTC businesses will no longer have to register in every other member state they sell to. Instead, they will file a single VAT return via the OSS system. The experts are pleased about this. “That is a real improvement because it allows companies to do things in a more streamlined manner, without having to go through 27 member states,” says Christoph Zenner, partner at PwC. All this creates an added incentive for any company based outside the single market to form a company within the EU to benefit in full from the scheme. The EU is expecting an increase in VAT revenues of about €7 billion a year as a result of the changes. Much more complicated are additional VAT obligations placed upon marketplaces. Third-party platforms, such as Farfetch and Zalando, are now on the hook for two types of transaction by sellers: any sales not exceeding €150 in value where the stock is held outside of the EU when the sale is made, as well as sales of any value by a supplier that is not registered as a business within the EU but has already transferred the stock being sold into the single market. “That’s quite an important overhaul,” says Zenner of PwC. “Initially, the platforms were not considered part of the supply chain. Where they are now, that’s something that is going to change your life.” The likely outcome is a more hands-on relationship for some marketplaces with the brands they carry. The effects of all of this can already be seen in Britain, where very similar rules were implemented at the start of the year. “What we’re seeing are some marketplaces saying, if you want to supply a customer in Great Britain and you want to use our distribution chains, you better make sure the goods are in our warehouses in Great Britain,” says William Bain, policy advisor at the British Retail Consortium. “And the same principle would apply for goods going to customers in the EU.” Department stores and other online sellers are advised to consult closely with their tax advisers. Tax compliance firm Avalara believes the new rules will affect the trading arrangements of thousands of retailers as well as contracts with suppliers perhaps not yet aware of the consequences. The risks for failure to comply include fines, double duties and the possibility of shipments blocked on arrival. Advance preparation, says Avalara’s Richard Asquith, is in everyone’s interest. “It's a whole re-engineering of business and information processes and flows that's going to be required.” Comments, questions or feedback? Email us at feedback@voguebusiness.com. More from this author: Vaccine passports and the duty-free hotspots to watch Is this the year of the suburb? Lessons for fashion from Israel's reopening

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