Kid Misso, Vice President of Product Management at Avalara, explains how the latest EU VAT reforms will affect British businesses.

On 1st July, the EU brought in a number of VAT reforms for retailers with “third country” status which signalled a seismic shift in the way British businesses trade with the bloc post-Brexit.

An estimated 26,000 e-commerce sellers will now need to register to pay VAT for the first time via the new Import One Stop Shop (IOSS) system, a new VAT submission which will create a fast-track for quick customs clearance following the new mandate to charge VAT at point-of-sale for consignments not exceeding €150.

The aim of these reforms, which include IOSS, is to boost cross-border online trade and promote trade across the EU’s single market by reducing compliance obligations. The changes also seek to tackle the stubborn €5 billion e-commerce VAT fraud gap, with member states looking to close import loopholes and co-opt online marketplaces into collecting VAT in place of sellers.

But while the reforms will have long term benefits, and ultimately simplify the tax process, the tidal wave of legislation post-Brexit has left many businesses feeling overwhelmed by the practicalities of selling online and internationally. And this is at a time when online shopping is more popular than ever and many businesses have dipped their toes into e-commerce for the very first time.

Small and medium sized businesses in particular are set to face the biggest upheaval. Not only are they lacking the tax consultants and lawyers which e-commerce giants have in their arsenal to help understand the impact of the changes on the business, but they will also be most affected by the removal of VAT exemptions for SMEs and shipments not exceeding €22, which would cover the sale of low-cost items like books.

These businesses will have to quickly get to grips with the upfront admin involved in these changes - from understanding the classification of products sold, to labelling VAT charges on products at the point of sale, and overhauling reporting systems. The shift won’t be easy, and it certainly won’t be cheap: UK e-commerce sellers are facing £180m in additional red tape costs to navigate the reforms. The average business will likely take an £8,000 hit to upgrade their web stores to calculate the VAT due on the sales of their products at the rate applicable to the country where the customer is located and to build the necessary record-keeping ahead of implementing IOSS.

 This will of course be a tough pill to swallow in today’s volatile economic climate when many sellers have been enduring a red tape headache for years. Adjusting to these reforms will also create work that a company may not have core competencies for, requiring a short term investment of time and resources into additional training. And the risks for failure to comply include fines, double duties and the possibility of shipments being blocked before arrival - consequences that will also impact customer experience and seller reputation.

 But these initial growing pains will sow the seeds for expansion. The introduction of the IOSS system means that businesses can now make one single VAT return instead of a possible 27 separate filings in as many as 6 different currencies - and this will open doors to huge growth opportunities with the world’s largest trading bloc.

 Even though the new regulations have already come into effect, there is still time for businesses to get their house in order now IOSS has launched, before the filing deadline on 31st August. But if sellers can get the right solutions and support in place now to set up the processes and knowledge they need to weather the storm, there is real potential for British businesses to become major exporters and lead the world in e-commerce, unhampered by third-country status.