Why has Brexit disrupted online shopping so disastrously?

The British government gave the impression the free trade deal it struck with the EU would enable goods to cross borders without painful charges. But for online shoppers and small retailers the reality has been very different. Ben Chu explains why

Some European retailers have simply given up on selling to the UK (PA)

Some online shoppers have been hit with a nasty shock since the new year.

Items that they have ordered online have taken much longer to arrive than usual and, when they have arrived, the customers have sometimes been asked to pay large and unexpected bills in order to release the goods from the delivery company.

The difficulties of buyers have been more than matched by the difficulties of online sellers.

Small UK retailers have faced significant difficulties getting their products to customers in mainland Europe since 1 January.

And some European retailers have simply given up on selling to UK customers because of the new barriers they face.

So what exactly are these surprise charges for buyers? And what’s the problem facing sellers? 

Is all of this e-commerce disruption due to Brexit?  

Why, given the British government gave the impression the last-minute free-trade deal it struck the EU would enable goods to cross borders without painful new charges, is this happening?  

In order to understand what’s going on it’s necessary to go back to before 1 January to understand what the situation was when it came to cross-border e-commerce.

While the UK was in the single market and customs union we were covered by the EU’s “distance selling” regulations for the charging of VAT, the levy that all EU countries impose on sales.

UK online customers

A UK customer ordering something online from within the rest of the EU – say a £200 coat – had VAT charged by the retailer at the point of sale, usually in the online payment part of the transaction. Then the package was shipped.

For the customer it was no different ordering something from within the EU than from within the UK itself.

Ordering something online from outside the EU – perhaps from the US or China – was different.  

When the goods coming in were worth more than £15, the buyer had to pay UK VAT of 20 per cent not at the point of sale but upon receipt (either to the delivery agent or at the Post Office).

Essentially, the change from the point of view of the UK online buyer since 1 January is that goods purchased online from the EU are now treated identically with goods purchased from everywhere else in the world when it comes to VAT.

So if you buy something worth more than £135 online from within the EU – think of that £200 coat – you will have to pay VAT and also potentially customs duties (tariffs) on it when the package arrives, which might well come as an unpleasant surprise.

To understand the impact of Brexit on online retailers it’s also vital to grasp the situation before 1 January.

EU online retailers

Under EU rules relatively small retailers based in the EU (with UK sales of less than £70,000) were allowed to sell something to a UK customer online and charge their local rate of VAT, rather than having to calculate and charge the UK rate, which would likely be different.

While the standard VAT rate is 20 per cent in the UK, it’s 19 per cent in Germany, 25 per cent in Sweden and 22 per cent in Italy and so on.

For obvious reasons, allowing small online retailers to charge their local VAT rate greatly facilitated cross-border EU internet sales.

But that changed with Brexit.  

From 1 January, when the UK left the single market, those small sellers in the EU were required by the UK tax authorities, HMRC, to register with them to collect UK VAT on sales to British customers worth up to £135.

And online marketplaces such as Amazon are required to collect the UK VAT directly on behalf of their third-party EU sellers.

That requirement has imposed a considerable new administrative burden on EU firms selling to UK customers.  

And some – such as a cycling part retailer Dutch Bike Bits – have decided that they will simply stop doing so, calculating that the expense and administrative hassle is simply not worth it.

UK online retailers

But small UK online sellers have also been hit hard by Brexit.

Before 1 January they could sell to EU customers just as easily as to UK customers under the single market’s rules, simply charging UK rates of VAT on sales purchases.

But now they now have to register with the tax authorities of the individual EU country into which they are selling and collect the relevant country’s VAT from their customers at the point of sale and pass it on.  

A plethora of new goods customs paperwork for UK firms selling into the EU has also pushed up their shipping costs.

Some have the option of letting a logistics company handle the VAT and customs, but this comes at a considerable cost.  

Ulla Vitting Richards, is the founder of VILDNIS, a sustainable fashion brand based in the UK, which mostly sells online.

“Until the end of 2020, we were shipping orders to the EU on an almost daily basis," she tells The Independent. 

But since the new year the complex nightmare of new trade barriers, particularly VAT, has forced her to put all shipping to the EU temporarily on hold.

“I am determined to find a way in which we can continue to ship sustainable fashion to our EU customers, although it is looking rather bleak at the moment,” she says. 

The result

The upshot of all this for UK online customers is hassle and the potential for unexpected charges – and also a reduction in choice and value if EU sellers refuse to ship to Britain.

This is not a trivial  matter. UK shoppers are estimated by FinTech Futures to buy a higher proportion of goods from foreign online stores than any other developed country, with 11 per cent of online sales coming from the EU in 2019.

For small UK online sellers the danger is that they will have to raise their prices significantly to sell to EU customers, which will make their wares uncompetitive on the continent. The bureaucratic hurdles may simply be too great for some to clear, meaning they too drop out of the market.

The UK was the most successful by far of all the EU countries [in seizing the e-commerce opporunity]. They’ve been robbed of this now because of Brexit

Richard Asquith, Avalara

Richard Asquith of the tax firm Avalara estimates some 27,000 UK small online businesses are being adversely affected.

“My email inbox is full of people saying ‘I’m closing down, this is existential for me’,” he says.

“What’s sad about it is, they were turned into international, if not global, business by eBay and Amazon. Lots of small business flourished under this. The UK was the most successful by far of all the EU countries [in seizing the e-commerce opporunity]. They’ve been robbed of this now because of Brexit.”

Nor does Mr Asquith expect this situation to change, saying that even a country like Norway, which is out of the EU but part of the single market, has not been able to avoid these kind of e-commerce barriers.

“We’re out – it’s black and white,” he says.