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Brexit: VAT Threats That Online Retailers Should Prepare For

By Avalara


By Richard Asquith - VP Global Indirect Tax at Avalara

Online retailers face added uncertainty as a result of Brexit: the snap election means the withdrawal of the latest plans to tackle Chinese online VAT fraudsters; and the UK’s 2019 exit from the EU VAT regime may add thousands of pounds in VAT compliance costs to over 35,000 micro online retailers.

This article will examine the general election, Brexit, and Vat, and look at the threats that online retailers face.

Election forces abandonment of £1.5bn Chinese e-retail fraud measures

The recent announcement of a 8th June general election caught the whole country by surprise, adding to the general Brexit-fuelled political and business insecurity.

The fallout from the announcement included the postponement of a range of online retail anti-VAT fraud measures, contained in the 2017 Finance Bill. This measure was aimed at curbing an estimated £1.5bn in fraud committed in the UK by Chinese and other non-EU online merchants.

The news will be welcome by marketplaces and fulfilment houses as it threatened to load them with a heavy administrative burden; but will mean legitimate UK online retail businesses will continue to be undermined by foreign fraudsters.

Government struggling with Chinese VAT battle

Many of the changes now dropped from the Finance Bill were aimed at tackling the ballooning problem of VAT fraud by Chinese sellers on major market platforms such as Amazon and eBay.  This involves non-EU sellers importing and selling goods to UK consumers without properly registering and remitting UK VAT to HMRC.

The National Audit Office estimated this year that the government is losing up to £1.5bn in VAT per annum as a result.  In addition to the lost tax revenues, such practices threaten to undermine VAT-compliant UK businesses with significantly lower sales prices.

In 2016, the UK introduced a sweeping range of new powers to curb this problem.  This included the powers to require non-EU online sellers to appoint special fiscal representatives in the UK who would be responsible for proper recording and payment of UK VAT. More controversially, HMRC was given the power to make the marketplaces directly liable for any non-compliant sellers’ missing VAT.

The results were initially impressive: the number of VAT registrations by Chinese sellers rose from 695 in 2015 to 7,185 in 2016.

However, the fraud problem has persisted into 2017. The European anti-fraud office, OLAF, issued a report earlier this year that stated the UK should potentially be charged with a bill of up to €2bn for its failure to properly control VAT registrations and customer fraud by Chinese sellers on their imports into the EU, via the UK.

The Spring budget announcement regarding the introduction of anti-VAT fraud split payments on B2C online retail was a further measure aimed at addressing this threat. The mechanism would work by UK consumers automatically paying the VAT element of any online purchase from overseas sellers directly to HMRC. A similar measure has been used in Italy for government business with some success.

Election delays latest registered fulfilment house scheme

The draft proposed measures to tackle the fraud problem would have created an approved fulfilment house scheme.  This would oblige UK fulfilment houses to perform basic due diligence on their customers’ imports, including measures to identify VAT and customs fraud.

However, following the snap election news, these measures have had to be stripped out of the Finance Bill to ensure its passage – including measures from the last budget – before the election. It is not clear when, and if, the measures will be introduced.

UK online retailers lose EU VAT exemptions – to hit 35,000 micro online retailers with major compliance costs

A second Brexit-related issue threatening UK online retailers is the loss of EU VAT exemptions for over 35,000 micro online merchants.  This may impose on them thousands of pounds in EU VAT compliance costs to preserve their EU trade income.

As a member of the EU, the UK benefits from the Distance Selling regime. This was designed to simplify the administration burden as far as possible to encourage free trade in the zone. One of the basic rules within this enables UK-based small businesses to sell goods to EU consumers using their UK VAT number. Generally, they are then exempt from having to register for VAT in each country until their sales hit the annual ‘distance selling threshold’ in every individual state.

This threshold is either €35,000 or €100,000 per year per country. Once over this threshold, the UK seller must VAT register as a non-resident VAT trader in each country. They can continue to sell, but must charge the local VAT, which is payable to the local authorities, through a country-specific VAT return.

The end of this exemption will have major implications for the estimated 35,775 UK micro-businesses who are currently selling online into Europe, who face being drawn into the EU VAT net for the first-time following Brexit. In 2016, The European Commission estimated the cost of this compliance burden at €8,000 per year, per country. This could add up to €216,000 per year for the EU27.

Small businesses are already faced with the digitalisation of the tax agenda – and even this is in constant flux, with the announcement last month that legislation to implement this initiative has been removed from the Finance Bill 2017.

Now, the many UK micro businesses that have been building up substantial new revenues from EU online retail will have to weigh up the compliance costs against the potential loss of trade. The alternative? Geo-blocking EU customers to avoid the VAT requirements, though this would bring an unwelcome end to EU sales.

Here, digitalisation isn’t really an option – it’s essential. It’s not just the challenges associated with understanding the various (and varying) VAT liabilities and charges in each EU state, but major potential for ‘lost in translation’ as businesses struggle to understand their obligations. Failure to do so will leave any online retailer exposed to investigations and potential fines, quickly quashing any lingering optimism regarding any business opportunity associated with “the divorce”.

Conclusion

The UK is the largest online retail market in Europe, spending more online than the next three largest markets combined. The spotlight on this market will remain, as part of the EU Digital Single Market strategy, looking to uncover business practices – such as antitrust initiatives – which might be hindering online sales or cross-border online retail.

The borderless nature of online business means that this will not be confined to the EU. By 2020, Accenture estimates that over 2 billion online shoppers, or 60% of target global population will be transacting 13.5% of their overall retail consumptions online. Online retail is big business – for retailers, and the tax man.

While uncertainty still characterises the commercial and political landscape at the moment, and the general election has muddied the water even more, this article should have given you a sense of what to look out for.

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