The UK Government is using Brexit to introduce a range of measures to deal with what they perceive to be VAT evasion and avoidance in the sale of business-to-consumer (B2C) goods to UK consumers by overseas sellers who use online marketplaces and also sell direct to UK consumers.
The measures are designed to:
- Ensure that overseas sellers pay the same amount of VAT as UK VAT-registered businesses. This is achieved by moving to a “point of sale” VAT collection mechanism as opposed to the current “point of importation” method. This should ensure that UK businesses are no longer at a competitive disadvantage from competition by overseas sellers who have been able to ship some goods to UK consumers free of import VAT.
- Reduce the risk of overseas sellers failing to pay the right amount of VAT on sales of goods that have been imported into the UK and sold from UK-located inventory.
The key measures being introduced by HMRC from the start of 2021 fall under four areas: goods shipped from outside the UK, UK-located inventory, customs declarations and postponed VAT accounting.
1. Goods shipped from outside the UK
Abolition of Low Value Consignment Relief (LVCR)
Currently, when an overseas seller ships goods valued at £15 or less from outside the EU to UK shoppers, there is no import VAT. From 1 January 2021, LVCR will be scrapped and overseas sellers will need to charge VAT on such sales. In 2012, HMRC scrapped LVCR for goods shipped from the Channel Islands. This is part of an EU-wide proposal to scrap LVCR and it will apply across the EU from July 2021. Currently, in some EU countries the LVCR limit is €22.
B2C sales of goods shipped from overseas up to £135 in value
HMRC is introducing a system where sellers of goods up to £135 in value will need to charge output VAT like a comparable UK business. Such imports will no longer be subject to import VAT. For goods sold directly by an overseas seller to a customer, this will mean that the overseas seller will be obliged to register and account for VAT to HMRC. Royal Mail or shipping agents will no longer collect the import VAT from customers.
Where the goods are sold by means of an online marketplace (OMP) such as Amazon, eBay etc, the OMP will be required to collect the VAT and account for the VAT to HMRC. This a huge departure from the current situation and puts the responsibility onto the OMP.
When the goods are sold to the customer, the seller will be deemed to be making a zero-rated supply of the goods to the OMP. This will allow the seller to be able to recover VAT on costs incurred in the UK.
Business-to-business sales of goods up to £135 in value
Where sales are made from overseas to UK VAT-registered customers, the overseas seller or OMP will not be obliged to account for VAT. The UK customer will need to provide its UK VAT number and the customer will need to account for UK VAT under a reverse charge.
For some years, HMRC has sought to place the onus on the OMPs to ensure that VAT is being properly charged. For example, the Fulfilment House Due Diligence Scheme, introduced in April 2019, was designed to tackle VAT and customs duty fraud by overseas importers by ensuring that UK warehouses kept detailed information about their non-EU customers.
2. UK-located inventory
The changes also impact overseas sellers who import goods into the UK and sell from UK inventory.
Where goods are sold via an OMP, the OMP will be responsible to account for output VAT on sales of goods which are located in the UK at the point of sale.
Where the overseas seller sells direct to the customer from UK-located inventory, the seller will remain obliged to register and account for UK VAT on the sale.
3. Customs declarations
Imports under £135 are not subject to customs duties. It will still be necessary for customs declarations to be made even though there will be no VAT or duty to pay. In recognition of this, the importation declaration should be quicker and easier to deal with.
For imports which exceed £135, it appears that import VAT and customs duties will still need to be declared upon entry into the UK.
4. Postponed VAT accounting
Businesses will be able to use postponed VAT accounting to account for import VAT on their VAT return for goods imported from anywhere in the world. This means the business will be able to declare and recover import VAT on the same VAT return, rather than having to pay it upfront and recover it later, subject to normal VAT recovery rules.
There are a number of detailed considerations such as how to calculate the £135 together with compliance and invoicing issues. If the VAT treatment changes will affect you or your business, you should familiarise yourself with the changes before the end of 2020.
Our VAT specialists would be happy to advise you on the impact of these changes, as well as helping you plan for other changes related to Brexit. For more information, please get in touch with your usual BKL contact or use our enquiry form.