Last week we discussed shipping into the UK, but what about the EU? Is there a difference? Back by popular demand, Shaun King, of KINGS VAT LTD, joins us for a bonus episode to explain. We’ll cover the difference between B2B/B2C sales, VAT implications, cost of compliance, return drawbacks, and how this is affecting markets across the pond.
Brian Weinstein: Welcome everybody to Sippin’ & Shippin’. I’m your host Brian Weinstein. We’ll be kicking it here every other Thursday, quenching your thirst for an insider’s take to enhance your customer’s experience. Grab your drink of choice, kick back, it’s Sippin’ & Shippin’ time.
All right. Welcome, everybody, to another episode of Sippin’ & Shippin’. I’m your host Brian Weinstein. And as always, I have Caitlin Postel in the house with me this morning.
Caitlin Postel: Hey, Brian.
Brian Weinstein: Good morning, Caitlin. How are you?
Caitlin Postel: I’m doing well today. Thank you.
Brian Weinstein: And back by popular demand is Shaun King from Kings VAT Ltd. How are you today, Shaun?
Shaun King: I’m good. Thank you, Brian. A bit wind swept over here in the UK, but we’re getting there.
Brian Weinstein: Yeah. Well, look, you’re on the cusp now. You’re only a couple hours away from a Friday Happy Hour. So at least you have that.
Shaun King: We’re looking forward to it. It can’t come quick enough.
Brian Weinstein: Yeah, I’m sure. I’m sure. Well, hopefully nothing blows down and nothing affects the tavern later.
Shaun King: Yeah. I tell you what, it better not.
Brian Weinstein: So, Shaun, tell us, we typically start out if I can remember to ask the question, just finding out what our guests are drinking. So what are you drinking today?
Shaun King: Today I’m drinking Yorkshire Tea with milk.
Brian Weinstein: Very nice.
Caitlin Postel: Switch it up on us. Shaun, in your honor we got ourselves some Awake English Breakfast Tea. So you switched it up.
Shaun King: You can’t beat it.
Caitlin Postel: That’s for sure. Brian, what do you think? Is it your first go at the breakfast tea?
Brian Weinstein: No. You know what? I like it. I do like it.
Caitlin Postel: Yeah. It’s delicious.
Brian Weinstein: I took a little bit less coffee today, because Caitlin told me she was bringing in some high energy tea. So I’m giving this a shot. I really do like it. So great.
The UK we discussed last week, and so this week we want to talk about the EU and the effects and impacts that Brexit’s brought to shipping into the EU. And, Shaun, a question just to start here, if I’m shipping from the US into the EU, what’s the biggest difference between shipping in each?
Shaun King: The biggest difference now is that you’ll have to register for VAT in the EU if you are selling from the US to any customer in the EU who isn’t in business, so a private individual, whereas before you didn’t have to do that.
Brian Weinstein: And now when I register for VAT and I’m registering for the EU, that’s a totally separate VAT than I have in the UK, correct?
Shaun King: Yes, it is. The way it’s going to work is that if you are shipping out of the US, and it doesn’t matter where your customer is in the EU, if the goods are valued at less than €150, which is approximately $180, so that’s forget the shipping, forget the tax cost, then you are going to have to register an account for the VAT.
The thing to remember is that Europe is a bit like the States, I suppose. It’s 26 countries and they’ve each got their own separate VAT rates. And they apply those VAT rates in different ways to different goods. So biggest difference is probably in the publications. Some countries have a reduced rate of that as low as 7% and some might charge 27% on the same item. So there is a difference. So, yeah, you’ve got one registration now, but it will cover 26 countries.
Brian Weinstein: So there’s a different VAT rate for each country that you ship into in the EU.
Shaun King: That’s correct.
Brian Weinstein: And that also varies by category. So each one of those 26 countries has a different VAT rate for each category. So what happens if I ship from the US into Belgium and then the recipient in Belgium ships into France?
Shaun King: Yeah. Well, I’ll use the ones that are the easiest ones always to use as a highlight, which is that if you were shipping into Germany, you’d pay 19% generally on the goods, but if you ship the identical same goods into the Netherlands, they would be 21%. And that would be, again, across Europe the different VAT rates ranging between generally 19-27% is the variance.
Caitlin Postel: And those percentages were already in place prior to Brexit. Those are existing tariffs.
Shaun King: Yeah, yeah. They’re already there. And this is something that has been thought about. It’s coincided with Brexit.
Brian Weinstein: It’s interesting because, and I’m going to ask the question, so if I ship to an entity, so if I am selling to a retailer, let’s say, in Germany, and then that retailer offers them up for sale and someone buys that in the Netherlands, did they have to make up that 2% delta?
Shaun King: Well, there you have a difference, you see, because if you are selling it to a retailer from the US, then the problem of VAT really isn’t your problem anymore. It’s the retailer’s problem. So the new changes really apply to business-to-consumer, not business-to-business. So what you’ve got is that you’ll have a pricing differential, which you have to work out.
If you use something you’d all know, Shopify, when Shopify sell goods, they will work out behind the scenes the VAT rate appropriate to each country and they will apply that VAT rate to each commodity. However, if you’ve got your own website which doesn’t have a Shopify, then what you either got to do is build in 26 different VAT rates, or you’ve got to take a pricing and work out some sort of weighted average VAT rate and apply that to your pricing and offer the goods for sale across Europe at the same price, bearing in mind, some countries you’ll make a bit, some countries you’ll lose a bit.
Brian Weinstein: I’m asking you all these hypotheticals because I know we have people that are going to be very curious. So let’s say I have my own online website based out of the US, can I aggregate and ship into, let’s say, Germany and inject the individual parcels into the parcel system, so I’m injecting at 19% and then from there they scatter out through the EU, or would I be then subject because I’m bringing it in in bulk?
Shaun King: They catch you again, because what they do then is they say you can bring the goods into Germany, but then you fall into a similar system. I’ll just explain, when you import the goods in, if you have no place of business, don’t stock the goods here anywhere, it’s called the Import One-Stop Shop. If on the other hand, in your scenario, you bring the goods into Germany, you unpack them, stick them into the postal system, you then have to register for a thing called the One-Stop Shop. You just drop the I out of it. And that says then that you have one VAT registration in Germany, but you have to account for VAT according to the destination of where all the goods go to. So you’re in the same position as you were under the Importation One-Stop Shop.
Brian Weinstein: Okay. So when we’re looking at pricing, does the same rules of self-reporting apply for the VAT like it does in the UK?
Shaun King: Yeah, you have the same situation. If you are caught by this, you’ll have a VAT registration. Now, interesting thing is, if you use the Import One-Stop Shop, you can register anywhere in the EU. It doesn’t even matter if you trade there. And then you do a quarterly VAT return which shows all the VAT that you’ve charged to all the customers in every different country.
So, we as a company, we prepare a VAT return and we would say to people at the end of three months, give us a spreadsheet, 26 columns, 26 entries for each country telling what the value of your sales are, we’ll work out the tax, we’ll put that on the tax return, we’ll pay it to, let’s just say, the French tax authority and they will distribute the money all around Europe.
That is up to like $180. Over $180, what happens then is that the goods come in and instead of you declaring on a VAT return, VAT is paid at import. So you’re still charging your customer same amount of money, you’re just paying it to the tax authority in a different way. Up to $180 you pay on a tax return. You have to be registered. Over $180 it gets paid at importation. The importation is in the name of the customer, but you as the vendor settle the tax bill on behalf of the customer out of the money you’ve got from them in the first instance. So from the customer’s perspective, he has no idea which way you are doing it.
Brian Weinstein: Right. Right. Okay. And so, just to refresh the listener’s mind, the UK it was £135 sterling.
Shaun King: Yeah.
Brian Weinstein: And then you’re saying it’s €150, which is—
Shaun King: €150 in Europe, which is about $180 at today’s exchange rate. It’s $182 and a few cents today.
Brian Weinstein: Okay. And did those same rules apply in the EU that we talked about with the UK where you have to figure in the fully landed cost including freight into that €150?
Shaun King: Yeah. It’s the VAT’s due on the price that’s payable by the customer. So it’s what he buys it for on the website to be delivered to his door.
Brian Weinstein: Understood. And in terms of duties.
Shaun King: If the goods are valued over €150, $180, then they fall into the customer’s duty regime. Again, it depends on the type of goods and where the goods originate from, then depends on what rate of duty, if any rate of duty is payable on those goods. So you would need to go back, speak to your shipping agent, and say to them, “This is my commodity. Do I pay duty on those goods going in?” If it’s over the €150 threshold, then duty becomes an issue.
The same as the UK, the other problem you have to be aware of is that the rules apply to individual consignment. So if the customer makes an order for three different items and you consolidate those into one package and each item is €100 then the value of the package is €300, which is in excess of the €150 and therefore VAT and customer duty becomes payable on that package. But if you send three packages of €100, just the VAT, no customer’s duty, because it’s below €150, becomes payable on that item. So it’s something you have to think about and probably factor into your pricing as well.
Brian Weinstein: Yeah. In your experience for the direct-to-consumer customers who have that product that would probably fall under that de minimis level, are you finding it’s worth splitting that order up into two or three parts to get around that duty piece?
Shaun King: Well, I think the thing is it’s not so much the customer as the vendor, because the vendor’s only going to get whatever he’s going to get for those goods. And if it was a duty bill, then the vendor’s going to pay the duty bill. So the customer will always say, if it’s $100, $200, “Why am I paying more if it’s $200, than if I paid two items of $100?” And you have to then explain that. Well, of course, you don’t. You still charge $200. It’s just that what you do is you subsidize out of that $200 the customer’s duty, so your margin’s reduced, profits reduced. It’s always the vendor that’s going to be the one that’s going to pay it.
Brian Weinstein: Right. In that regard, though, when you start to factor in… So if I those three, let’s just say shoes, where we have three pairs of shoes, each pair is worth €100 with freight. When you have to offset that against parcel, because now you have three parcel shipments versus one, and then factor in the duty, what do you find yourself recommending more to the vendors that you’re advising? To split it? Or is it just not worth it because the freight is more expensive than the duty?
Shaun King: The problem becomes is it depends on what the commodity is because the commodity drives what the rate of duty is. So if you’ve got a commodity that attracts a double digit rate of duty, then it becomes quite prohibitive. Because bear in mind that you start off with a cost of €100, and if you’ve got 10% to put on there, then that becomes obviously €110. And then you go add VAT on at 20% on the €110, whereas before you were running VAT on that 20% of €100. So you’ve got an additional €10 plus you will have an additional duty cost of effectively €2 on the €10 as well, if that makes sense. So your additional goes to €12 on those goods. So you have to do the maths and it depends on the percentages. If it’s a 1% duty rate, it just won’t be worth your while. But if it’s possibly textiles, footwear, leather goods, that type of thing may well be worth your while splitting the consignments.
Caitlin Postel: So it sounds like there’s a fine line between deducting that VAT or increasing the price to keep that end user engaged. Have you heard of merchants experiencing any downturn into those markets as a result of these changes?
Shaun King: Without a shadow of a doubt. There is all sorts of problems that are arising at the moment. One is the customers are finding out that they are now being charged, they think, more for the goods they were before. They think the goods gone up in price, because before they were seeing the price. There was also a concession which said that if goods were valued at less than €22, there was no tax, there was no duty to pay.
Caitlin Postel: Yeah. And what was that called, Shaun?
Shaun King: That was low value consignment relief.
Caitlin Postel: Right.
Shaun King: LVCR as they called it. Now, that will go on the 1st of July, the €22. Well, of course, what was happening was that goods were coming in and rightly or wrongly were being valued at less than €22. So when the customer bought something, he only paid what he bought. He only paid what he saw on the website. But, of course, what he is now finding out, he goes on the website is the price has suddenly gone up because VAT is having to be paid on it. Even if it’s only €20, you’ve still got €4 to pay on it, which is still gone up. There is an additional cost in there.
Now the other side of things is that, American in particular, American vendors are saying, “Well, I don’t want to get involved in the tax system in the EU. It’s too much hassle. If my customers want to deal with it, then that’s up to them.” So what they’re saying is, “Deliver the goods to the end customer and get him to pay the VAT and the customer’s duty when you deliver it to him.”
So what now is happening is that in some instances, the postal operator is turning up at the door with a parcel, and he’s saying, “Well, I’ve got your box of trainers, your sneakers here. And actually they were €100, but there’s 10% duty on top of that, so I need another €10. And there’s 20% VAT on that, so I need another €22. So I actually need another €32 off you. And, oh, by the way, I’m going to charge you €10 for knocking on your door. So I now need €52 off you.” So then the customer suddenly says, “Whoa, hold on a minute! I’m not having that. Take it back. I don’t want it. I’m not going to pay.”
And that is becoming a bigger issue with customers and they’re suddenly realizing the true cost of the goods, because before, goods were coming in a lot less, a lot cheaper value. And the UK has already seen it. Europe hasn’t seen it yet because the rules don’t come until the 1st of July. So there will be… If there are any Bulgarian people listening, I apologize, but the idea of the postman turning up in some mountainous region in Bulgaria and demanding an extortion amount of money off some poor individual out there, it isn’t going to end too well. So there is all those problems.
Brian Weinstein: So the rise of eCommerce really comes from the brands doing a tremendous job of being as frictionless as possible and just making that customer experience so smooth and so seamless. This sounds like at least one to two giant steps backwards.
Shaun King: Yeah, but what it does is… Because, as in the UK, the big boys, Amazon, eBay, and such like will do all the VAT accounting for the vendor. What that’s doing is it’s driving people onto the Amazons and the eBays and selling their goods through those sites rather than dealing direct with the customer, because there are obviously advantages. One is that they don’t have to go into the tax system. And then obviously they’ve got a distribution network through Amazon as well. So that is happening, that people are abandoning their traditional delivery methods and going into maybe an FBA with Amazon, or even seller fulfilled arrangers. So there are pushes and pulls at the moment. And the market has got a lot of settling down to do as well.
Brian Weinstein: Well, it sounds like, for simplicity purposes, you’re almost better off saying I’m either going to find a 3PL or use an Amazon within the EU, within the UK, just absorb the duty, and then just ship it within the EU or the UK, because then you can build it into your price.
Shaun King: Yeah. The other thing that obviously we haven’t touched on really, which is the other price, which is the cost of the compliance of doing it as well. That’s when it does become prohibitive, because unlike the UK, which only requires a tax agent, what the EU does is it requires you, if you are registering, to appoint a fiscal representative. A fiscal representative becomes joint and severally liable for any debts that may be incurred. Now, of course, if you are a fiscal rep you want paying for being a fiscal rep because you are taking on a potential liability. So that dramatically increases the cost for any non-EU business. And that applies as much to UK as it does to businesses out in the States as well.
Brian Weinstein: Explain that to me a little bit further. So are you implying that an EU 3PL, for example, that receives in product in bulk has some sort of… Go ahead.
Shaun King: No, the way it will work is that if you are required to be registered in the EU as a foreign business, then you are required to appoint a tax representative to act for you. So you have the cost first off of the VAT registration, then you have the cost of the tax representative acting for you as a fiscal representative, so taking on your liabilities, and then the third cost is that they have to render the returns for you.
Shaun King: So it’s not that you have an option in this instance. You have to appoint somebody to do it for you, whether you like it or not, whereas you don’t have to do that in the UK. So it’s a big difference. And cost-wise a significant difference as well. Because, as I say, if somebody’s taking on as a fiscal representative an unknown liability, then they want recompensing for taking on that unknown liability.
Even if you use a 3PL or somebody else like that to store your goods, it doesn’t get you out having to be VAT registered. The only way you get out of VAT registered is if you use an online marketplace, because an online marketplace could store your goods or sell your goods and account for the tax to the tax authorities and that takes you out of the VAT net. But, of course, one size doesn’t fit all. And that’s still a problem.
Brian Weinstein: So we didn’t touch on this for the UK episode, and I guess that’s why I’m asking this question for. So if I am a brand and I ship in, I’m just going to stick with the footwear because we’ve been going that route for a while. So I’m a brand, I ship in two pairs of shoes—
Caitlin Postel: Trainers.
Brian Weinstein: Trainers. Thank you.
Shaun King: Yeah, okay.
Caitlin Postel: It’s the tea. Forgive me.
Brian Weinstein: It’s the tea. Exactly. So the customer decide they only want one pair and they return the other. Can I draw back that VAT and any duties I may have paid?
Shaun King: Yeah, you can.
Brian Weinstein: You can. Okay.
Shaun King: There is a procedure to be able to draw that back and that’s something you would do on a quarterly basis, as long as you ship the goods back outside the EU, assuming you do, or you destroy them. Generally you either have to destroy the goods or ship them back. And in some instances, the retailer finds out that it’s easier to destroy them than to actually send them back. So they have to be destroyed under certain circumstances, but, yeah, you can do that.
Brian Weinstein: Okay. And even if I’m using an online returns aggregator.
Shaun King: Yeah.
Brian Weinstein: Okay.
Shaun King: Well, yeah. If you’re doing that, what generally tends to happen is that if you’ve got returns on such like, you’ll have a company that will deal with that for you. They will do one of two things. They will either arrange to destroy the goods, or they will hold the goods until such time as they have a significant amount to justify or warrant sending the goods back with the costs of such like as well. So sometimes the goods may remain in country for three, six months.
Brian Weinstein: Correct. We have some return partners that we work with that will aggregate the product and then bring it back to us in bulk into one of our facilities. And so you can work a drawback program.
Shaun King: Yeah.
Brian Weinstein: Are you familiar, are there any software programs that a brand might be able to use to assist with that?
Shaun King: Not really. It tends to be because you’ve given the credit at the time, then the tax authority will give you the credit when you pay the customer and then all you have to be able to do is evidence you’ve actually shipped the goods back. So as long as you’ve got evidence of a manifest bill of lading, it shows the goods going back, and that will satisfy the tax authority.
Brian Weinstein: Okay. And that falls under the same bucket as self-reporting.
Shaun King: Yeah, yeah.
Brian Weinstein: Yeah. Okay. So that can be done quarterly or when—
Shaun King: Yeah. Duty is a separate procedure, but you can get it back if you’re going to do that as well.
Brian Weinstein: Great. Caitlin, any other questions that I may not have covered?
Caitlin Postel: No. I think as we come to a close here, wrapping it all, tying the first episode together with the last, I know we spoke about a lot of different things. The EORI, the E-O-R-I number, the VAT number. Shaun, what would you say are the three most important ways that an eCommerce store can prepare for these changes if they haven’t already?
Shaun King: Well, the first thing I would say is that if they’re selling into the EU, or even into the UK, and they’re not using an online marketplace, they should be registered. That’s number one. Make sure that they get that done. Even though the new scheme is coming 1st of July, they need to be applying for it now, because it’s going to take time to get that up and running.
Two is they need to review their pricing to make sure that they’re maintaining their profit margins in view of the amount of tax and potentially duty that they’re going to pay. And three is they need to make sure their software is up to making sure they can report the information as well. So they need to work with whoever their service provider is to establish exactly what information they will need so as they can provide that on a timely basis.
Because generally in Europe, you’ve only got three weeks, more often than not, in which to report the transactions, maybe four weeks at maximum. So it’s a fairly quick turnaround. And as a service provider, we know that the last thing we want is everybody giving us the information on the 31st day of the month and expects us to get the returns in and everything else on time, because that isn’t going to happen.
Caitlin Postel: Yeah. So it sounds like homework, homework, homework. Get ahead of the curve or else your competitor’s just going to be shipping it and scooping up your customers. But I’ll tell you, as a consumer, if a parcel carrier showed up and asked me for an extra 35, 50 bucks, forget it. I don’t know that I’d ever shop at that store again. I don’t know how that’ll pan out.
Shaun King: That’s a big problem, Caitlin. That’s what people are finding is that there is a massive resistance to that, because you’re paying somebody $10 to knock on your door. And that has never gone well. It’s like all of these things, what you have to do is you have to do all the preparation. If you get it all right day one, it’s okay. If you mess it up on day one, you might be three years down the road and you finish up with a big tax bill. And that’s the last thing you want.
Caitlin Postel: Understood. No, very valuable information.
Brian Weinstein: Yeah, absolutely. And, again, frictionless is what’s the success of eCommerce. Also setting expectations with the customers so when the customers buy something they know that’s their final price. Having somebody show up with an extra bill is not going to go over well.
Shaun King: Yeah. The other thing that you’ll find out is that, and I will say, is that in the States, you very much do pricing as price and tax. And what I will say to people, price it as the total price. We don’t do price and tax in the EU, in the UK, we just do total price. If we start seeing the tax, then we start moaning, because then we realize how much we are paying. The whole idea of having government is that we’re not supposed to know how much tax we’re paying.
Brian Weinstein: Exactly. Exactly.
Caitlin Postel: And that’s the gem right there. Yeah, all in one price.
Brian Weinstein: Yes.
Caitlin Postel: Why split it out? Don’t show the math.
Brian Weinstein: Right. Well, Shaun, this has been fantastic. I know we could really go down a rabbit hole with a lot of this stuff, but that’s why they pay you the big bucks to come in and help them sort all this stuff out.
Shaun King: That’s it.
Brian Weinstein: Yeah. Appreciate—
Shaun King: If you want to sort them out, then send them my way. I’m happy to educate them.
Brian Weinstein: A thousand percent. So anybody that wants to reach out to Shaun King at Kings VAT Ltd, we’ll have links that we’ll post with the podcast. Obviously now this will be our second episode in a row with Shaun and he clearly knows this stuff. He’s been doing this for a long time and he is a tax expert on the EU and the UK. So, Shaun, appreciate you coming on. I will leave you with this, the English tea gives me a little bit of cotton mouth. I’m not going to lie.
Shaun King: Brian, no. Brian, I can’t believe you’ve said that.
Brian Weinstein: I feel like I may need a cold beer now. It’s only about 10:30 in the morning here, but I need something to wash that down.
Shaun King: I could comment on Budweiser, but I better not, had I?
Brian Weinstein: No, no. Well, appreciate it again, Shaun. Thanks for coming on. Caitlin, you want to take us out?
Caitlin Postel: Sure. Thank you so much, Shaun, for joining us again. Love this bonus episode. Guys, tune in next week, which is going to be June 3rd. Thereafter we’re going every other Thursday. You can subscribe at SippinAndShippin.com or check us out on your favorite podcast platform, Apple Podcast, Spotify, whatever works. Give us a thumbs up. Subscribe. Love to have you guys here. We’ll talk soon.
Brian Weinstein: Yeah, absolutely. And for those of you in the States, because this is coming on right before Memorial Day weekend, have a great long weekend, everybody. Take care.