Understand the 2021 VAT Changes and How it Will Affect Your Business
Ever heard of the VAT tax? At this point, most dropshippers probably have. What you might not know is Europe is making some new changes to the VAT tax, and you need to know about them in order to continue scaling your dropshipping stores.
Before we get into all the updates happening with VAT, let’s fully understand what VAT exactly is.
“A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.” SOURCE
So in Europe, each country has its own VAT rate.
Many dropshippers have come to us asking how these VAT changes will affect their business and what they need to do in order to stay ahead of the game.
So we’re going to lay it all out for you in this blog post!
Let’s Get Really Clear on What Exactly is Changing Starting on July 1, 2021:
As a business owner, you are now responsible for paying VAT if your online store makes more than €10.000 in sales revenue per year.
Previously, each country had a different distance selling threshold, meaning that the VAT tax did not necessarily apply to every country you were shipping to depending on your revenue. Now, no matter what country you are shipping to, the standard threshold for the VAT tax is €10.000 per year.
Imported items valued at less than €22 are no longer exempt from paying VAT.
Before these changes, distance sellers did not need to pay VAT on all items being imported that were valued under €22. Beginning July 1, 2021, VAT will be charged on ALL commercial goods imported into the EU, regardless of value. For shipments with a value of €150 or below, this can either be charged at the time of the sale, or be collected from the end-customer by the carrier. Due to this change, Europe has introduced the Import One Stop Shop (IOSS). This resource allows for sellers electing to charge VAT at the time of sale to more easily declare and pay VAT to tax authorities, rather than having the customer pay VAT costs when their packages land in their country.
VAT can be paid to any European country through the Import One Stop Shop (IOSS).
Prior to the new VAT laws, distance sellers who hit the threshold for VAT in multiple countries had to register with each country and pay VAT individually. Now, by registering for VAT through the IOSS, filing, and payment of VAT is much easier.
You can go about business as usual by charging your local VAT rate if you are a European business doing less than €10.000 in revenue per year.
So European-based sellers do not have to register with the IOSS if they do less than €10.000 in sales annually. These sellers can continue charging the VAT rate of their country when shipping to anywhere in Europe.
Why are the VAT Rules Changing?
Simplifies VAT across all of Europe.
Managing VAT for 27 countries can get quite confusing, leaving a lot of margin for error. This change will make the VAT process significantly more efficient for both governments and tax authorities as well as dropshippers!
Decrease Fraud.
Historically, VAT fraud has been fairly easy to commit and has cost European countries billions of dollars in the process. VAT fraud can be perpetrated in a variety of ways and ranging from dropshippers to large corporations. Either way, these VAT changes significantly decrease the possibility of fraud.
Giving European-based merchants a fair chance.
Due to the lower threshold for individual products and overall revenue enforced by the VAT tax laws, European business owners have not received a fair chance to succeed in eCommerce. These new changes level the playing field for all online businesses.
Now That You Understand What Exactly is Changing with VAT, What Should You Do to Prepare?
Register for OSS or IOSS
For European business owners that are distance selling to other European countries, you’ll need to register for the One Stop Shop (OSS) system to pay all your VAT taxes through one tax authority.
Now, if you’re a non-European business, you’ll want to register for the Import One Stop Shop (IOSS) system. This will allow you to follow the proper processes for products valued under €150. The IOSS creates a faster process for filing and paying VAT, while also speeding up the process of importing your products through customs.
While IOSS is not required to pay VAT, it makes the process much more efficient. Dropshippers who do not utilize IOSS might experience longer shipping times due to extra valuation checks at the border, as well as extra VAT charges.
If you’re using an online marketplace, such as Facebook Marketplace, these rules may be different. Under these new VAT regulations, it is possible to de-register for VAT in selective European countries. This is because the marketplace you’re using might be considered a vendor of the products. So then the marketplace is the party responsible for collecting VAT at every sale.
It is important to remember that under OSS rules, non-European dropshipping stores will need to acquire a “European intermediary” to assist in managing VAT obligations. Click here to learn how to acquire a European intermediary.
Hiring a Tax Consultant or Lawyer
Dropshippers already know the typical pains of handling taxes for your business. So as you can imagine, VAT taxes are even harder to understand. If you are unsure what changes need to be made to your business based on VAT (or don’t know where to start), hiring a consultant or lawyer is definitely worth the investment.
Every business is unique and requires different action items. Therefore, contacting a tax professional may be in your best interest, as they will be able to fully examine your unique business needs in order to advise you on the best steps to take going forward.
Do Your Own Research
Even though these new VAT changes are fairly clear and straightforward (or at least, we hope they are after reading this blog post!), more details and information will most definitely come to the surface once these new regulations take effect on July 1, 2021.
For this reason, subscribe to our newsletter to receive more updates as information becomes available. Also, do your own research so that any potential misconceptions you may have can be clarified as fast as possible!
How Zendrop is Addressing These Changes
As always, we consider tax compliance and consulting with licensed professionals as the best practice. With this being considered, we also want to continue to offer you solutions to continue conducting business. Refer to our two scenarios below for how we are working through these legislation changes.
If you choose to register for the IOSS and pay VAT, our prices will remain unaltered from these legislative changes. We simply request that you provide your OSS or IOSS registration ID with us.
If you choose to not register, we will be charging a $1.25 surcharge for orders shipped to the 27 countries listed in the new legislation. This surcharge is an additional shipping fee that Zendrop incurs to ensure that the shipping carriers that ship to your European customers are adequately registered to pay VAT in your place. Please note, that according to our advisors, this technically does not represent full compliance with the new legislation, however, this is an alternate solution that we are making available for you to continue conducting business.
Time to Make Some Changes
Based on the new 2021 European VAT laws, change is going to be unavoidable for your online business. Whether this means opting out of selling certain products to Europe, raising your prices, or even hiring a tax expert, you’ll need to prepare to adapt and push forward through this transition in business.
