When the UK formally left the EU (aka BREXIT), the game changed from a trading perspective. In this article, we focus on what the UK leaving the EU means for online sellers, big and small, pitfalls that can be avoided and some pro tips for smooth shipping and cost mitigation.

Basic Customs Principles

In the most basic terms, leaving the EU single market means parcels containing goods have a customs border to cross. Regardless of where a customs border exists, when moving from one customs territory to another, goods are checked thoroughly. Checks occur at both the country of export and the country of import. Having a customs border to cross also means there can be import taxes (VAT and Duty) implications for either the buyer or the seller.

INCOTERMS

Incoterms are international rules for interpreting trade terms that are used in international commercial contracts and transactions. They are published by the International Chamber of Commerce (ICC) and used by businesses worldwide to clarify the responsibilities of buyers and sellers. For shipping e-commerce orders (B2C parcels) to overseas consumers, there are only two INCOTERMS you need to be familiar with: DAP (or DDU) and DDP.

DAP “Delivered at Place” (or DDU “Delivery Duty Unpaid”, as most people still refer to it). This incoterm means that the shipper of the parcel is not accepting any liability for any import fees, VAT or Duty. These costs must be borne by the recipient (i.e. the person who ordered the goods).

In the real world, the parcel will be shipped from the seller’s warehouse, travel to the destination country, and arrive at a holding location (like a local Post Office, for example). The customer will then be contacted to pay any taxes and fees applicable before the goods are delivered. If they refuse to do so, are unable to be contacted or do not get around to it after a few weeks, the parcel will enter the reverse-logistics return flow, and eventually, it should find its way back to the shipper’s warehouse as an “undeliverable” return.

Beware of sending e-commerce B2C parcels on DAP (DDU) terms. If used, the liability for cross-border taxes and fees must be made clear during the checkout process. If not, the consumer presses the “BUY NOW” button, the parcel ships and gets held en route to its destination for tax collection, and then the consumer gets a nasty surprise. In this case, they will often refuse to bear these “unexpected” costs, and thus, the parcel will not be delivered to them, and they will want a refund.

DDP “Delivery Duty Paid” unlike a DAP or DDU shipment, sending on DDP terms means the shipper accepts the liability of any taxes and fees applied to the goods at the port of entry or customs border. From a CX standpoint, this ensures a friction-free journey for the parcel. From a consumer perspective, DDP will always be preferable.

Customs Declarations & Data Requirements

Until the rise of e-commerce, parcels could cross customs borders with simple paperwork affixed. This could be a primary copy of a commercial invoice detailing the value and contents of the parcel or through the post with a declaration form sticker called a CN22 (or CN23). These CN declarations could be completed with a pen by the shipper and stuck on the parcel next to the address label.

These paper-based processes that relied on commercial invoices or CN declarations were in place for decades. However, they were not designed with e-commerce parcel volumes in mind, leaving them vulnerable to abuse. Under-declaring the value of the goods was very easy for unscrupulous shippers to avoid meeting their tax liabilities when sending from one country or customs territory to another.

To stop the widespread abuse and tax avoidance that this created, global regulators and postal authorities introduced mandatory data requirements for parcels, and thus, cross-border shipping was digitized. In the last few years, to send e-commerce goods B2C from one country to another, the shipper must transmit EDI data (Electronic Data Interchange) via their parcel carrier or postal service to accompany the shipped goods. As a minimum, the data transmitted must accurately declare:

The commodities that make up the contents of the parcel (i.e. the goods contained within it)
The commercial value of the goods within the parcel
Who shipped the item within the parcel (i.e. the sender)
Who bought the goods or is to receive the goods (i.e. the recipient)
Where the origin of the goods is (i.e. where were they made)
Who will be responsible for any import taxes (VAT and Duties) that are due on the transaction

Before BREXIT, none of this was needed when sending the UK to the EU or vice versa, as the UK was a member state and benefited from being part of the EU’s single market and free trade zone. Goods sent from one member state to another do not need to be declared as there is no border to cross and thus no VAT or Duty liabilities. This is no longer true for UK-based sellers sending parcels to the EU (or vice versa).

HS Codes & Country of Origin Classification

HS codes, or Harmonised System codes, are standardized numerical references that are used to classify traded products. They are used by customs authorities worldwide to identify and classify goods to apply trade tariffs and other trade measures. HS codes are essential for B2C e-commerce because they help ensure that goods are correctly classified, and the correct duties and taxes are paid at the border. They also help to facilitate trade by providing a common format for describing products that is not language-specific.

Country of Origin Classification - The rules of origin are also essential to cross-border trade. Internationally focused e-commerce companies should ensure they are familiar with the laws of origin that apply to their products. By complying with the rules of origin, businesses can avoid potential problems and ensure their products can move freely across borders. Rules of origin determine the country in which a good was produced. This is important because it determines the country's trade policy with respect to that good. For example, if interest is created in a country with a free trade agreement, the good may be imported into the other country without tariffs.

What about the “BREXIT Deal”?

The “Withdrawal Agreement” negotiated between the UK and the EU that came into force at 11 p.m. GMT on 31 January 2020 only applies to goods wholly manufactured in the UK or EU from materials sourced in these countries. From an e-commerce shipper perspective, unless you are selling goods that are entirely, and provably, UK or EU-origin goods, the deal is of little benefit to you.

EU Import VAT

In the EU, VAT and Duty are controlled separately. The European Commission dictate the overarching rules. However, VAT is a state-controlled tax giving individual Member States the autonomy to set their rates. This is why VAT rates vary from one Member State to another.

EU Import Duty

Duty is a federal tax, meaning the rates are applied uniformly across the EU. If you want to check the EU duty rate applicable to your product, you can query the European Commission database here:

European Commission - TARIC

IOSS

On the 1st of July 2021, the European Commission changed the EU’s VAT regime. The most significant change from a UK-EU parcel shipping perspective was a simplified VAT collection and remittance regime called IOSS (Import One Stop Shop).

IOSS allows overseas sellers that ship goods valued at 150 EUR or below to hold a single VAT registration for the whole of the EU. This will enable shippers to collect the VAT at the correct rate when they sell to an EU consumer and remit the collected VAT through a single, simplified process. IOSS registration allows the parcel to cross the EU border without friction and any further taxable demand for the sender or receiver of the goods contained within it. To register for IOSS, you must use a VAT intermediary, there are many. Here are a selection of links to some of the more popular ones:

Pro Tips

Educate yourself on the rules and take professional cross-border trade advice. Mistakes in compliance around cross-border taxation and trade can be costly, and fines and sanctions can be significant. Take advice. Be cynical. If something that seems too good to be true is presented to you, it probably is. If so it could be storing you up significant liabilities for later on
Register for IOSS, and if you sell via Marketplaces (Amazon, eBay, Etsy, etc.), make sure you hold and use their IOSS. If the Marketplace made the sale to the EU consumer, then they are liable for the sales VAT, not you.
Use the European Commission TARIC database to check your HS codes are correct and what duty rate will apply to your goods when entering the EU. Many UK shippers check these things on the HMRC website, but there are differences, so if EU expansion is the goal, it is more important to check the EU rules and regulations than the UK ones.
Ensure the data in your systems is clean and well-organised. Use ten-digit HS codes and accurate COO classifications for your goods.
DAP (or DDU) is a false economy for parcel shipping unless you sell and send extremely low-value goods. Whilst the initial outlay / parcel may be lower, your WISMO contacts and return rates will be much higher than if you ship DDP. You will also significantly increase your chances of receiving negative reviews from disgruntled EU consumers. If you dispatch DAP (DDU), ensure this is crystal-clear at the checkout to help mitigate brand damage from unhappy EU shoppers.
Review your carrier rates and options thoroughly. Things have settled since the post-transition turmoil of 2021, and competitive rates are available from various carriers, big and small. Some of the more niche carriers can also provide “duty drawback” solutions, meaning if your goods get returned, you can reclaim the customs duty paid at the point of import.
Consider importing and holding some or all of your inventory directly in the EU. This is not a suitable approach for all e-commerce businesses. Still, in some cases, appointing a 3PL in the EU that holds inventory and ships the goods to EU consumers from their EU-based warehouse can mitigate significant costs.

Like it or loathe it, BREXIT has happened, and things have become more complicated. Many EU-focused e-commerce businesses have still thrived despite the apparent challenges. With 440 million consumers reachable by road in a few days from the UK, many opportunities exist to grow your brand profitably in the EU.

Contact SHIPMAX if your EU strategy needs a post-BREXIT revamp.

UK to EU e-commerce; Basics & Pro Tips

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