Brexit means VAT: Imported Goods and E-Commerce
The Taxation (Post Transition Period) Bill, which received royal assent in early December introduces a new regime for the importation of goods into the UK after the 31st of December 2020 transition period comes to an end. While the bill includes provisions amending the existing rules between Great Britain and Northern Ireland, aviation fuel prices, and insurance premium tax, this article will focus on the implementation of value-added tax on online marketplaces by overseas persons and low-value importations. We will assess the new legislative regime and what it means for businesses shipping to the UK after Brexit.
Taxation (Post-Transition Period) Act 2020 (TA)
The Act serves to abolish the current EU based relief from import VAT for low-value consignments which apply to goods not exceeding £15. Therefore, VAT will be due on all consignments arriving at the UK (subject to exceptions for excise goods such as alcohol and tobacco). Overseas sellers selling goods located outside the UK at the time of sale, valued at £135 or less will now have UK supply VAT obligations. According to the UK government, the relief is being removed ‘to combat widespread abuse and to avoid trade distortion’. Considering the plights of the UK high street this year, the intention behind this rule is to protect it from unfair competition from overseas sellers being able to sell low-value goods into the UK free of VAT, especially through the European Union where its close geographic proximity to the UK would make it easier for goods to be delivered to the UK with ease. As such, removing the relief will increase the number of parcels on which import VAT will have to be collected, and therefore transfer the potential additional burdens on parcel carriers. It is expected that overseas sellers will be able to discharge their obligation either by registering with HMRC and paying any import VAT due on a periodic return, or by paying the import VAT due to the parcel carrier who will make a payment to HMRC on their behalf.
Where the value of imported goods exceeds £135, then customs declarations and import VAT will in general need to be accounted for on import as at present.
Online Market Places
According to the HRMC guidance, an Online Market Place (OMP) is a business using a website or mobile phone app (such as a marketplace, platform or portal) to handle the sale of goods to customers, which involves setting the terms and conditions on how goods are supplied to the customer, authorising or facilitating customer payments, and ordering and delivering the goods.
Under the new regime, OMPs which facilitate the sales of goods to Great Britain will broadly be responsible for the collection and payment of VAT for sales under £135 unless they are registered for UK VAT. OMPs will also be liable for the VAT on goods of any value that are located in the UK at the point of sale and sold by an overseas business through an online marketplace. This means that OMPs engaged in e-commerce to the UK will be subject to new burdens, including charging and accounting for VAT at the point of sale according to the precise nature of the goods, as well as keeping records of the goods sold to make sure they get accurate information to apply the correct VAT treatment to them. Should OMPs fail to adequately show they have taken reasonable steps to ensure the correct VAT is charged, they will be held liable for under-declared VAT.
However, the bill provides for a ‘reverse charge of VAT’ to business customers of the OMP if they are registered and have UK VAT registration number. The business customer will then be responsible for accounting for any VAT due on their VAT Return using a ‘reverse charge’ procedure and will be able to recover the VAT as input tax on the same VAT Return under normal VAT recovery rules.
VAT registered UK businesses will continue to be able to make zero-rate sales of goods to EU businesses. EU member states will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries. This means import VAT and any customs duties (tariffs) will be due when the goods arrive in the EU.
The bill is arguably lacking in the field of enforceability, as the HMRC has not clarified how these measures will be policed for OMPs, should they fail to comply with the VAT rules. Moreover, there seems to be a lacuna in the act for how the HMRC will enforce the rules on overseas sellers which do not use an online marketplace with a UK presence. The success of this new regime will heavily depend on HMRC's propensity to enforce and regulate the changes brought forth by the Act as abuse of VAT regimes has been known to happen in the past.
The measures take effect from the end of the implementation period, i.e. 11 pm on 31 December 2020. If payment for an order is received before 11 pm on 31 December 2020 and the item is dispatched after that time, the old rules will still apply. The majority of changes will be felt by small foreign businesses which sell goods by mail order or through their online marketplace; it remains to be seen whether they will be willing to continue to sell to UK customers after the 31st of December. On the other hand, large online marketplaces, such as Amazon and eBay, will undertake the responsibility for collecting and accounting for the VAT on sales through such marketplaces, even when the goods are in the UK at the point of sale. In the words of the UK's former prime minister, Theresa May, 'Brexit means Brexit', but under the new taxation regime, Brexit also means VAT.