Senior VAT Director, Vertex
E-commerce has boomed over the past decade thanks to an increased appetite by both businesses and consumers to buy and sell goods online.
Global e-commerce sales are expected to reach USD8.1 trillion by 2026, compared to around USD5.7 trillion last year. Large organisations continue to adapt to accommodate online sales while online-only businesses pop up in their thousands. In 2021, over 65 new e-commerce businesses were created across the UK daily.
Indirect tax landscape for e-commerce
For most e-commerce players, the ability to scale is a strategic priority, and many will be turning their attention abroad to increase sales and reach new markets. However, evolving global VAT and indirect tax rules are a risk to that growth and present a challenge that’s easy to overlook until a problem arises. Online businesses of all sizes selling globally are acutely affected by indirect tax and cannot afford to be complacent.
Tax authorities across the globe are implementing new digital and cross-border sales rules to recoup lost revenue from brick-and-mortar spending and ensure a level playing field. Additionally, tax authorities are trying to keep pace with digitalisation, with some European countries drastically reforming tax reporting processes.
Italy, for example, mandated real-time reporting of e-invoices, meaning transactional data and information must be made available to the tax authority immediately. Although the UK is currently behind the curve compared to EU countries, it is not unlikely that HMRC will follow the blueprint set by its European neighbours.
Tax authorities across the globe are implementing
new digital and cross-border sales rules to
recoup lost revenue from brick-and-mortar
spending and ensure a level playing field.
Businesses looking to sell globally online need to put tax compliance at the top of their agendas, otherwise, they run the risk of failed audits, penalties and fines, reputational damage as well as loss of revenue. However, the facts suggest that many are unaware that tax compliance abroad should be a priority.
Research by Vertex showed that e-commerce businesses are finding it increasingly difficult to comply with VAT rules as well as produce accurate and timely (localised) VAT reports. Often, inefficient systems and processes underpin these tax headaches.
Manual VAT processes are no longer sustainable, and e-commerce and finance systems don’t have all the functionality needed to be compliant in the face of fast-paced change.
Alternative growth channels
Almost 900,000 UK businesses are now using marketplaces to maximise online sales. While marketplaces offer a fast route to market without investing in a dedicated e-commerce site, there are also specific VAT and indirect tax burdens for both marketplace operators and sellers.
Vertex research found that both marketplace operators and sellers are confused about who is actually responsible for collecting and remitting VAT. Sellers are unsure when and where they are liable for indirect taxes and at what rates.
Additionally, the accuracy of indirect tax calculations is a common issue — partly due to EU rules becoming increasingly complex. Despite marketplaces being a vital channel for growth, 7 out of 10 sellers agreed that indirect tax challenges could deter them from continuing to use marketplaces.
Preparing for the future
Being tax-compliant now doesn’t guarantee compliance in the future. Indirect tax management must be part of strategic conversations for businesses selling online.
Businesses traditionally selling domestically may quickly find they are not equipped to handle international VAT rules. And as both the EU and UK tax rules evolve, businesses selling into other countries need to be ready to adapt.
This requires indirect tax management software with the flexibility to handle transactions in real-time, provide automatic updates for any rule changes, achieve accurate calculation and determination and have the capability to handle digital reporting requirements. Data integrity must also be supported as an essential foundation of compliance.
By taking a deeper look at indirect tax management and adopting a future-focused model,
e-commerce businesses can be confident that their strategy is primed for growth.
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