VAT and e-commerce: more change ahead

The EU has identified a €5bn tax gap arising from non-compliance with VAT rules for cross-border online sales – a sum expected to rise to €7bn in the next two years. Changes to the VAT rules for e-commerce could help to close that gap.

Currently, an EU-based business should charge consumers in other EU member states the business’s own local VAT on any goods supplied until the distance selling threshold for a member state is breached. The thresholds apply over a rolling 12-month period and vary from €35,000 to €100,000. Once the threshold is breached for a given country, the business must register for local VAT in that jurisdiction and charge local VAT on all further sales there.

The position is rather more complicated for non-EU businesses selling online. At present, where those businesses are not VAT registered, it can be left to the purchaser to make good the VAT on delivery of the goods. However, in many cases VAT is not accounted for at all. Another twist is the existence of ‘low value consignment relief’: goods worth under €22 that are imported from outside the EU are not subject to VAT.

These factors make for distortion of competition and are open to possible abuse by non-EU traders seeking to sell to EU consumers without accounting for VAT. For example, low value consignment relief could be abused by businesses deliberately locating outside the EU in order to sell into the EU without VAT, subdividing consignments in order to reduce the value, or just fraudulently mislabelling packages.

The EU is responding by changing the VAT rules for e-commerce. Some of the changes have already started to bite. For example, effective from April 2018, fulfilment businesses in the UK dealing with imported goods on behalf of third parties must be registered and perform due diligence. Similarly, since March 2018, online marketplaces have been made jointly and severally liable for the unpaid VAT liabilities of sellers operating on their platforms. A due diligence burden has been imposed on the online marketplaces to verify the VAT position of the sellers using their platforms.

More changes are coming. From 2021, a ‘one stop shop’ will be introduced allowing online sellers to account for VAT in every EU jurisdiction through a single VAT registration. This will be an extension of the ‘mini one stop shop’ already in place for sellers of electronically-supplied services. Although there will be an exemption for small businesses with under €10,000 of cross-border sales, this is much lower than the current distance selling minimum per country threshold of €35,000. So in future international businesses will have to deal with cross-border VAT issues sooner than they do now. That said, the one-stop-shop approach should make the VAT administration easier to handle.

Low value consignment relief will also be abolished to end the perceived abuse that this enables.

There is, however, a big elephant in the room: Brexit. We clearly don’t know what the long-term fallout from Brexit will be on the role of the UK within the EU VAT system. But it’s unlikely that the UK’s departure will result in any simplification of VAT for cross-border traders.

For a free, no obligation, VAT risks and opportunities meeting to discuss your circumstances, please contact Sarah Friend.