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Major VAT changes proposed from 1 January 2021 for online consumer sales

As part of its post Brexit VAT reforms, and in order to align how the UK treats EU and non-EU goods imported into the UK post-31 December 2020, HM Revenue & Customs (HMRC) has issued a consultation paper. This proposes that the VAT accounting and collection obligations for online consumer sales should transfer from the actual seller to the online market place (OMP) that facilitate such sales.

The proposed changes would be in addition to the previously announced withdrawal of the current £15 VAT exemption threshold for imported goods (the so-called Low Value Consignment Relief or LVCR) and will apply to all B2C sales of goods from EU and non-EU countries.

The package of e-commerce VAT reforms would be introduced on 1 January 2021 when the Brexit transition period ends, and the UK leaves the EU VAT system. The measures being put forward by the UK include:

  • Removing the existing £15 VAT exemption on imported goods being sold to UK consumers. These result in VAT being charged on all goods coming from the EU and the rest of the world whatever the value.
  • For e-commerce transactions up to £135, requiring the online seller to charge VAT to the consumer at the point-of-sale and declare this via a new monthly import VAT return (effectively moving the tax point from the time of importation to the time of supply in the UK).
  • Making OMPs liable for VAT on sales made by sellers where:
    • The value of the goods does not exceed £135 and are imported into the UK after the sale has been made, either by a UK or by a non-UK seller; and/or
      Goods of any value which are already in the UK when sold by a non-UK seller.

The above changes are broadly similar to the EU’s e-commerce measures which were initially due to be introduced at the same time. However, as a result of COVID-19 the EU is likely to delay its changes (which are not Brexit-related but aimed at reducing the loss of VAT revenue from overseas suppliers) until 1 July 2021. As if Brexit wasn’t complicated enough, this could result in a six-month period where the UK and EU VAT regimes for B2C sales will be very different.

What types of goods are impacted by these changes?

The types of goods impacted by these changes are typically sold either via OMPs, such as eBay and Amazon, or via the seller’s website directly to consumers. The proposals could have significant impact for delivery agents (such as the Royal Mail, DHL, FedEx and the like).

At present, goods imported into the UK under £15 in value are exempt from both Import VAT and customs duty under the LVCR. Goods over £15 but not more than £135 attract only Import VAT and not customs duty. HMRC has announced that it will abolish the LVCR with effect from 1 January 2021 and are proposing to make all imported goods up to £135 in value liable for domestic VAT rather than Import VAT, thus shifting the point where VAT is collected from the time of importation to the time of supply to the customer.

So, what will this mean for OMPs?

Firstly, where the goods are sold via an OMP, the obligation to account for VAT will shift to the OMP operator (and not the actual seller). The OMP will be obliged to collect and account for the VAT to HMRC on the sale to consumers. This measure is similar to the rules for B2C supplies of electronically-supplied services under the Mini One-Stop-Shop (MOSS) scheme. It also follows the principle of the Fulfilment House Due Diligence Scheme (FHDDS) that was launched last year by HMRC. This puts the onus on fulfilment houses (i.e. warehouse operators) to police the VAT system and verify that suppliers using their fulfilment facilities are registered and account for UK VAT. Failure to comply can lead to the fulfilment house being held jointly liable for the VAT on the seller’s goods.

For suppliers not using an OMP but selling goods up to a value of £135 directly to consumers via their own websites, they will be liable to register and account for UK VAT under a new monthly import VAT return. The VAT due will extend to sales of goods from the EU and non-EU and will also include those currently excluded under the £15 low value consignment relief. It is expected that delivery agents will need to have systems in place to identify if the seller is VAT registered and account for the correct amount of VAT. They may also be required to spot false valuations and misdescriptions, as well as any goods liable for excise duty and other transactions, such as private sales and gifts that may have a different VAT treatment.

These proposed changes are aimed at making HMRC more effective in its compliance and tax collection functions by narrowing down the number of taxpaying entities liable for UK VAT and limiting the potential for VAT fraud. However, for OMPs and delivery agents, it means a bigger administrative burden, possibly resulting in increased costs to consumers buying goods online via OMPs and overseas sellers’ websites.

How will these changes affect electronically-supplied services?

It’s not just the physical movement of consumer goods that will be impacted by Brexit. UK business that make sales of electronically-supplied services to consumers will also need to consider changes from 1 January 2021. Currently, a UK-established business can register with HMRC under the MOSS registration scheme and account for VAT to consumers in all 28 EU Member States. Similarly, an EU supplier can register under MOSS in its own Member State and do the same including sales to UK consumers. However, after the end of the transitional period, the UK will not be able to avail itself of the current MOSS registration. UK businesses will need to register under MOSS in an EU country of its choice. Similarly, an EU business will need to register under the UK’s own system.

The MOSS system in the EU will change to the OSS system on 1 July 2021. This doesn’t only mean dropping ‘Mini’ from the acronym, but it extends the scheme from electronically-supplied services to cover other B2C services and BC2 goods. It will eliminate the need for registration under the distance selling rules throughout the EU. However, as the UK will no longer be part of the EU, this is likely to mean more UK businesses having to register in multiple EU jurisdictions.

UK businesses making cross-border consumer sales will need to consider how these proposed changes will impact their VAT accounting and registration obligations well ahead of the end of 2020.