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For many merchants, the build-up to Brexit has felt like forever. But as of January 2021, the Brexit trade deal changes finally happened. Months later, many ecommerce businesses, brands and retailers still feel unprepared. In fact, 76% of small businesses, post-Brexit admit to feeling unsupported and confused. 

With so much uncertainty, we wanted to set the record straight and help you understand what you need to do and how you need to do it, so we caught up with shipping experts, ShipStation to discuss exactly that. 

What are the key things merchants need to consider for smooth shipping into and out of the UK, post-Brexit?

All ecommerce businesses need to provide the following information for items to pass through customs: 

The above list is non-negotiable and missing them will lead to delays, fines, additional duties or failing to pass through customs entirely. 

Collectively this information is really important. It tells customs what an item is, its value, where it comes from and where it’s going. For example, the EORI (Economic Operator Registration and Identification Number) number helps to identify the sender, while harmonisation codes are in place to standardise how customs operate across the globe. 

Gaining an EORI number is easy and applying for one takes minutes via the UK Government’s dedicated portal. From small businesses to large enterprises, it’s imperative that you have an EORI number if you’re sending an item out of the UK commercially.

When it comes to harmonisation codes, you can search for these here. Simply describe what the item is and its code, VAT rate, duties and any other information that comes up.

What are customs forms and why do ecommerce businesses need them?

Sending any product out of the UK now requires custom declaration forms. 

These forms vary slightly depending on your courier.

The CN22 form is used for items with a value of up to £270. Whereas, a CN23 form is for items valued above the £270 threshold and requires additional accompanying paperwork such as a commerce invoice or an appropriate licence. EDI forms operate in the same way. 

Ecommerce business owners can access more information about UK customs here.

For UK merchants shipping goods to the EU, what are the VAT changes?

Now that we have a Brexit trade deal, and the UK is no longer part of the EU, things aren’t as simple as they used to be. UK businesses need to consider EU Import VAT.

To be clear, this differs from UK VAT. Currently, UK businesses only need to collect VAT on sales after they surpass the £85,000 threshold. These domestic limits do not change, though all ecommerce businesses should ensure they understand what their UK VAT obligations are. 

EU Import VAT varies from country to country and depends on how your business operates, the value of the package you’re sending, and the item’s country of origin. We suggest seeking official tax advice when necessary to ensure your business is charging the amount of VAT and is meeting necessary legal requirements in every country you sell in. 

So, when do UK merchants need to pay EU Import VAT?

There are a few things merchants need to consider: 

  1. Is your product item value less than €22? If the answer is yes, then you’re not subject to EU Import VAT. However, it’s important to keep in mind that this threshold may change as of July 2021, as currently there are low-value consignment relief thresholds in place.
  1. Is your product item valued between €22 and €150? Here, EU Import VAT is due. This is often charged at 20% but can vary on the country. 
  1. Is your item valued at more than €150? Again, EU Import VAT is due, and additional import duties may apply. 

If the item you’re exporting is alcohol, perfume or a specialist product additional excise duties may apply, no matter what the value of the item is, so always check!

How do merchants pay EU Import VAT?

There are two options: 

  1. You leave EU Import VAT unpaid

With this option, the customer will see the price of delivery without VAT. All you need to do is complete the paperwork, and the courier charges the customer the EU Import VAT

Whilst this might seem like the easier option, it can lead to long shipping delays, payment refusals and disgruntled customers. 

So, check whether you need to register for tax in the countries you’re operating in. 

  1.  You collect EU import VAT and pay the courier

Just like with option one, the customer sees the delivery price, but you pay the VAT and other duties to the courier, not them. They often call this Delivered Duty Paid (DDP). 

Again, check whether you need to register for tax in the countries you are operating in.  

Are there any differences for merchants based in Northern Ireland?

If your ecommerce business is based in Northern Ireland and you’re shipping to the EU, then you will require an additional EORI number starting with XI. 

However, duties don’t apply if you’re shipping from Northern Ireland to the Republic of Ireland. This is because the shipment is treated as an ‘intra-community’ and not subject to extra charges. 

For Northern Ireland to Great Britain, exports are treated as a domestic UK transaction. UK VAT is also still applied.

What does Brexit mean for the future of ecommerce?

Around the world, COVID-19 has accelerated the shift towards more online shopping. In the UK, it’s unlikely that Brexit will reverse this trend, but it is having an impact. As a result, your customers’ buying experience is of greater importance than ever, and is key to your growth.

The new customs and tax regulations can complicate the ecommerce journey, resulting in delivery disruptions and delays if you don’t get it right. For example, what’s an EORI number or harmonisation code, the difference between DDP and DAP, how to update your fulfilment and delivery process software, communicate with the customer, and set realistic expectations.

Last word

For many online retailers, Brexit can seem daunting, particularly smaller businesses and entrepreneurs just starting out. Understanding Brexit’s impact on the ecommerce industry and what is expected of you is critical to navigating your way through this post-Brexit era successfully. 

Where can I learn more about Brexit?

About ShipStation:

ShipStation makes EU shipping easier by managing much of the new administrative procedures, but even if you decide to go it alone, remember that Brexit has happened and now is the time to act. Brexit related EU import VAT, customs charges and changes to how you ship items are here to stay.

Successful ecommerce operators know that operational advantages are just as important as product or marketing advantages when it comes to scaling their business. One such metric to keep an eye on is your “Cash Conversion Cycle”: a measure of how many days it takes for a business to turn invested cash (usually purchased inventory) back into cash in its bank account. This is typically measured as: Days Inventory + (Days Accounts Receivable – Days Accounts Payable). But let’s step beyond the formulas and make this real – these recent financial statements from an international apparel brand shared by Jay Vasantharajh are illustrative of why this metric is so important:  

financial statement

For some more context, here’s the same brand’s income statement: 

cash-conversion-ecommerce

One of the structural disadvantages of a product business versus a software/service business is the cash required to constantly reinvest in the business. But in this specific instance – and note, it’s a brand that has raised no venture capital financing – you’ll notice that they somehow managed to keep £53M on hand, with £176M in sales in the year. As a rapidly growing ecommerce brand, that cash pile is somehow nearly 4x their after-tax profits for 2019! They got here through a “Negative Cash Conversion Cycle”. 

As you’re scaling your ecommerce business, while paying for acquisition costs (that often don’t recoup after several reorders from customers), and incrementally placing bigger and bigger inventory orders, it’s normal to see a strain on your cash reserves. Most brands have a 40-100 day cash conversion cycle, which means that if you’re selling £3k a day you could have up to £300k of cash stuck in operations instead of in your bank account. A negative cash conversion cycle, however, means that your vendors finance your operations – you’re given more time to pay your bills than it takes for you to sell the inventory. There are three levers to pull to reach a negative cash conversion cycle.

Increase Accounts Payable

The easiest way to achieve a negative cash conversion cycle is to increase the terms of payment on all of your inventory orders. Although most ecommerce brands begin with 15-30 day terms, as you build trust with your suppliers it makes sense to continue to extend this timeline. The brand in the examples above eventually reached a 163-day payment term. When combined with accurate inventory forecasting, you can quickly see how a brand would be able to turn over its inventory long before the payment for it is due. Instant cash on hand. 

Reduce Accounts Receivable

Direct-to-consumer businesses typically don’t have a significant Accounts Receivable line item because they don’t offer net terms to their buyers. That being said, there are still two ways you can reduce AR to become a negative value: pre-orders (which allows you to collect cash before inventory is purchased or created) and annual subscriptions (if your brand is in a product category that allows this, because you’re able to collect the cash up-front for future product deliveries).

Reduce Inventory 

As your brand scales and you introduce more SKUs that have varying turnover rates, it can become increasingly difficult to project how much inventory you should order per product. That being said, if you’re able to reduce the amount of SKUs you hold, increase the manufacturing+shipping time from your supplier, or accurately project inventory needs based on historical SKU-level results, you’re able to minimize the cash you have tied up in inventory in hand.  

It’s often “sexier” to scale your acquisition strategies and product strategies than it is to focus on your financial management strategies, but effective ecommerce operators know that optimizing for cash-on-hand can often be the difference between life or death. This is especially true as acquisition costs rise and payback timelines on first-time buyers continue to get longer and longer. Whether you’re building your business towards an exit or into a consistent cash machine, every growing ecommerce business needs to take a hard look at their cash conversion cycle and pull the levers to drive it as low as possible. Cash really is king.  

Your Ecommerce Experts

Hopefully, this has given you some insight into how you can measure and optimise your cash conversion cycle regularly. If you’d like to speak to our team of experts for further advice on how to scale your ecommerce strore get in touch today!