It took more than four years for the UK to finally leave the EU but the rushed trade agreements have left thousands of UK businesses to fend for themselves as the government guidance remains incomplete. It would have been naive to not expect teething troubles but to see the UK to EU trade plummet by nearly 70% was shocking.
As we pass 60 days of Brexit entering the final month of the first quarter of 2021, let’s take a deeper look at the impact of Brexit on UK businesses and especially e-commerce businesses. Before authoring this article, I had numerous conversations with independent e-commerce business founders. I have based this article on those discussions to bring forward first-hand experiences.
It is the VAT that hurts the UK e-commerce businesses the most
The 1,246 pages-long post-Brexit UK-EU trade deal is a seemingly comprehensive piece aiming to take care of all aspects of the flow of trade. The most relevant sections for e-commerce businesses pertain to the custom declaration forms, EORI numbers, custom tariffs based on country of origin and most importantly, the changes in VAT – that’s the key issue for SME e-commerce businesses.
Now that the UK is no longer in the EU, it is being treated as the third country and EU rules on third countries require VAT to be paid on all goods imported. So, when UK businesses sell to their customers in the UK, the EU customers must now pay VAT which is approximately 20% depending on the nature of goods. When the cost of the product is less than £135, the VAT is levied at the point of sale ie the UK business pays (but the business would pass on this cost to the customer and include it in the order). When the product is worth over £135, VAT is paid at the point of delivery ie the EU customers pay when they receive the goods.
Plus, EU customers have to complete customs declaration for goods imported from the UK. Although this procedure is performed by the couriers, the cost is passed on to the customer amounting to approximately €20 per declaration
For example, when an EU customer buys a pair of boots from a UK e-commerce business for €100, they will be charged €20 in VAT and then €20 for the customs declaration plus some arbitrary handling fee by transporters making their total over €140.
UK e-commerce brands stop selling to the EU and lose loyal customers as it is no longer financially viable – EU customers won’t foot the bill and UK companies can’t incur losses by absorbing the extra costs.
While this article focuses on small and medium-sized e-commerce businesses, big businesses are not untouched by the issue either. When one of the UK’s most legendary brands like Fortnum and Mason halt the sales of their products to the UK – when John Lewis’ scraps overseas delivery – and when the popular sports retailer, JD Sports, expresses frustration with disruptions to EU order deliveries calling Brexit considerably worse than expected, the gravity of the situation becomes clear.
A recent survey of 57 UK luxury brands found widespread disappointment with extra costs and shipping delay even though many brands are absorbing the extra costs – something that is simply impossible for smaller brands.
What UK e-commerce brands think
Online store selling CBD products consider halting sales to the EU
“There's been confusion and chaos and it almost feels like we've handed leverage over to customs officers and courier services. As per the Brexit deal, UK businesses don't charge VAT to EU customers. Our software recognises European orders in the checkout process and the 20% VAT is taken off the total.
However, when the order reaches its destination, we've seen customers being charged up to 140 euros of "customs and admin fees" plus the country's VAT. This results in customers rightfully refusing these parcels, which are then returned to us. Shockingly some other orders don't get charged at all. No parcel is treated the same with some being charged duties even when not applicable.
“We're a customer-centred business and are taking responsibility for all delays and costs to ensure we keep up satisfaction, but the environment is just too risky for us to want to pursue further EU visibility long-term,” stated Kim, For the Ageless.
Sofa-in-a-box startup investing in a hub in Portugal
“We’re a start-up that designs sofas in the UK, makes them in Portugal and sells them exclusively in the UK market. We run a vertically integrated, just-in-time model and the port disruption has been significant, we’ve seen costs increase, shipping times increase and have tried lots of different solutions to get products into the UK. We’re investing to 10 times our capacity in Portugal to meet customer demand, and essentially our view is ‘we’ll figure it out, we’ll make it work’ – but it has certainly been challenging,” said Geof Bull, chief marketing officer at Swyft.
Men’s ring company struggling with the paperwork headache
“We import men’s rings from various places within Europe and it’s been a nightmare since Brexit. Some designers no longer want to sell to us because of the paperwork involved and the extra problems it causes them. We aren’t large enough to place big orders at once, but if you duplicate our issues across lots of small businesses across the UK it becomes a growth problem. Also, some deliveries have been held up because of paperwork issues. It's costing time and money which on top of the pandemic it’s a headache we didn't need,” stated Clare MacLachlan, Newman Bands.
UK skincare startup pivoting to the US market
“For a skincare retail start up in the UK, the immediate consequence is that beauty brands and suppliers based in the EU are harder to get or in some areas, they just don't sell into the UK any more due to duties. The long-term consequence is that it may impact our decision as a business to ship to and expand to EU countries as the cost is now higher to service a small market (vs US which is a bigger single market),” said Alisha Wong, skoosh skin.
Popular homeware brand expanding its newly opened warehouse in the Netherlands
“As the EU-UK agreement was signed very late, on the 30 December 2020, I don’t think British and Europeans businesses understood the full implications of it and it was particularly the case for B2C, us included. As EU countries are large markets for Joseph Joseph, the company decided to anticipate a hard Brexit quite early on. Our B2B channel moved to a warehouse in the Netherlands about two years ago. B2C being quite small we kept our fulfilment in the UK but as the Brexit deadline approached, we kicked off a migration project in August 2020.
“As B2B had already successfully migrated part of its fulfilment to the EU, it was a fairly straightforward process for B2C. We were also able to rely on our German entity for VAT registration and it’s something we’re closely monitoring in case we go over the threshold in certain EU countries.
“We consider ourselves very lucky and we’re happy it didn’t negatively impact the overall experience of our European customers on our website,” stated Charlotte Cau, head of performance marketing at Joseph Joseph.
UK’s fastest growing online diamond store thinking about fulfilment hubs in the EU
“We were as prepared as we could be considering the information that was given to us prior to change but are still facing problems. However, the government hasn’t done enough to help businesses like ours, we were advised on what they thought would happen but there appears to be different rules being opposed across different countries, depending on how the goods are being transported and what type of goods you’re sending. While it may not always be possible to get a definite guide, the government appears to be letting us in retail just work it out as we go along.
“We are now making changes to make things easier for both the customer and our business in the short term but it will also prompt us to rethink our fulfilment strategy across Europe,” said Ben Stinson, head of e-commerce at Diamonds Factory.
Sneaker store opening EU fulfilment centre and offering DDP
“Like most businesses, we were fully aware of the deadlines but had very little information regarding the financial and logistical implications surrounding leaving the EU. We have actually temporarily suspended all EU orders from our website until we can provide a better customer experience for these customers.
“We’ve now already started planning to open a fulfilment centre inside the EU, so we can carry on shipping to our customers without the tax and logistical implications. However, these things take time, and we don’t anticipate it to be up and running until later on in the year, leaving us out of pocket for a significant period of time.
“To somewhat compensate for this, we plan to offer DDP (delivery duty paid) shipping to international customers, so they can still order albeit at a higher price, but without any unexpected tax and duties,” said David Franks, co-founder and chief marketing officer at Kick Game.
The collateral damage
It should be noted that things are no different for EU businesses selling to UK customers. EU businesses are now required to directly pay UK sales tax, or VAT, on sales under £135 (€155; $190). They also have to register and file quarterly declarations with the UK authorities. Many EU-based small e-commerce businesses have either stopped selling to their customers in the UK, are planning to open UK warehouses or selling via large e-commerce platforms such as eBay, Amazon or Etsy.
The solution — third-party logistics and EU-based subsidiaries
Unfortunately, the post-Brexit-era will see the demise of cross border sales of many small e-commerce businesses on both sides but growing brands will (and are) focus on strengthening their 3PL and opening EU subsidiaries. Brands quoted in this article like Kickgame, Joseph Joseph, and Diamonds Factory are already going down this route.
Callum Campbell, chief executive officer of Linnworks, an e-commerce automation platform, suggests that the following actions can minimise any long-term disruptions caused by the new trading arrangements.
Deliver stock directly to the EU. Businesses could consider arranging for a percentage of inventory to be delivered directly to fulfilment centres around Europe.
Find alternative providers. It’s important for businesses to identify suppliers that are better positioned to meet their specific requirements after Brexit.
Set up warehouses closer to customers. If a company ships a high volume of products to any particular region, they could invest in proximal facilities rather than continuing to ship from a single location that may now have import or export implications.
Worth over £220 billion, the UK is considered to be the third biggest e-ommerce market in the world and last year, UK businesses saw a 57% increase in worldwide e-commerce sales. So, while Brexit will cause disruptions, it may not turn out to be a massive blow to the sector overall.
Also, while business owners continue to express disappointment with the lack of clear guidance and the Government’s attitude, the Government has the following to say in its defence:
According to the BBC, the new VAT model ensures goods from EU and non-EU countries are treated in the same way and that UK businesses are not disadvantaged by competition from VAT-free imports. The new system also addresses the problem of overseas sellers failing to pay the right amount of VAT when they sell goods in the UK. We anticipate this will bring in £300m in tax every year, to fund essential UK public services.
As we currently remain bereft of concrete data to assess the full impact of Brexit on e-commerce, we can only wait and watch.
Antonio Wedral is an co-founder of London-based startup Novos.