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HMRC plans e-commerce VAT reforms

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HMRC is planning to make reforms to foreign e-commerce VAT with effect from the end of the Brexit transition period (31 December 2020). The reforms are intended to: 

  • tackle an estimated £1.5bn in VAT evasion by foreign e-retailers; 
  • level the playing field for UK online and high-street retailers; and 
  • help improve the speed and efficiency of processing imports of e-commerce goods for the tax authorities, consumers and sellers.

The key measures under consideration are: 

  • scraping the current £15 low value consignment relief (LVCR) VAT exemption for parcels imported as sales to online UK shoppers; and 
  • making facilitating marketplaces responsible for VAT on certain seller transactions. 

These changes would mirror the EU e-commerce VAT package reforms (now expected to be introduced on 1 July 2021) and similar reforms made in Australia in 2018.

 The ending of the LVCR import exemption had been announced in August 2018 as part of the no-deal Brexit preparations for 2019. A planned small parcel registration and filing scheme has now been withdrawn following the revised October 2019 Brexit Withdrawal Agreement, and all registrations scratched.

LVCR is currently available for any vendor importing goods for an online sale, but it is most often used by Chinese sellers. The LVCR scheme is part of the EU’s €22 VAT-exempt regime in the EU VAT Directive. HMRC is taking the opportunity of leaving the EU VAT system to reform this process.

The ending of this relief would remove unfair tax competition facing UK retailers, both online and offline, from Chinese and other foreign online merchants that can sell VAT-free. The threshold has long been abused by non-resident sellers that under-declare the value of parcels in order to clear the UK border as VAT exempt. 

HMRC wants to also simplify VAT collections and parcel processing for customs on the thousands of deliveries that arrive into the UK every day. The import VAT collection process will therefore be shifted from the border to the seller’s website. This will be limited to parcels that do not exceed £135 (the same as the current customs duty exemption threshold). Sellers will charge and collect the supply or output VAT from their UK customer at the online checkout. Sellers must register for a regular UK VAT registration to report the supply VAT.

HMRC will likely place a limited ‘goodwill clause’ onus on operators, couriers and postal agents to identify consignments misdeclared below the £135 boundary. However, many single items may be packaged together, exceeding the defined, intrinsic value of the consignment, so HMRC is considering obliging sellers to produce and include a VAT invoice for the sale. Alternatively, it could require a VAT registration and invoice number to accompany the package to reconcile back to subsequent VAT return.

B2B transactions below £135 would also be subject to the new regime, but the reverse charge would apply to avoid cash collections. Any parcels above £135 would be subject to the current rules: VAT and duties must be settled at UK customs before the goods can be passed to the customer. This may be done by the seller, or the customer. 

A further measure HMRC is considering is passing the VAT rights and obligations of certain seller transactions over to the marketplaces that facilitate them. The marketplace would become the ‘deemed supplier’ for VAT. Other responsibilities, including product liability and health and safety obligations, would remain with the underlying seller. Again, this is included with the EC e-commerce package for next year.

HMRC is looking at two particular marketplace facilitated transactions:

  • sales by any sellers with imports into the UK not exceeding the £135; and
  • sales of goods already within the UK by non-UK resident sellers.

To effect the marketplace VAT reporting in both cases, the seller would first make a deemed zero-rated supply to the marketplaces. The marketplace would then make a domestic UK supply, with UK VAT, to the UK consumer. The marketplace could declare the VAT in its own UK VAT return. 

The proposed changes are not without their practical challenges. The January 2021 start date gives limited time for HMRC to complete the policy details and for operators to implement the new rules. It will be interesting to see how smaller marketplaces, that lack the resources of the large global players, will cope monitoring B2B transactions, and also how the reforms will work alongside the Northern Ireland Brexit dual-border VAT regime. 

Issue: 1492
Categories: In brief