Brexit, Overseas Online Retailers & VAT- a disaster waiting to happen

With Brexit looming large the government needs to urgently put a plan into place and examine the effects that Brexit will have on Online Marketplaces, Overseas Retailers, Global Fulfilment, Distant Selling, Subsidised Chinese post, LVCR Abuse, VAT & the Split Payment model.

We propose that the government must:

Introduce VAT Split Payment model for ALL UK & NON UK online retailers.
Introduce a destination based VAT system for cross-border e-commerce, as proposed by the EU.
Scrap LVCR.
Stop subsidising Chinese post via UPU terminal dues.

The benefits are:

VAT income will sky rocket.
VAT will be collected at point of sales using “Split payments” by the Online Marketplaces such as Amazon & eBay no matter where the stock or seller is located.
LVRC abuse and the unfair 20% price advantage from distant sold low value goods will end. This will include all EU companies who will be able to distant seller into UK after Brexit.
It will level the playing field for UK online retailers competing on Online Marketplaces with Overseas Retailers who illegally don’t charge VAT.
Under valuations of small packages entering the UK will end.
Small packages will be able to move more freely through the new Customs Declaration Service (CDS).
Chinese retailers will not be able to benefit from artificially low postages rates that are causing a huge market distortion in pricing of physical mail order goods.
UK Online retailers will flourish as Chinese sellers pull out of the UK market as they will no longer compete with the illegal 20% price advantage.

Post Brexit VAT disaster

Here is the scenario of what will happen if we leave the EU and keep our current out of date VAT System & LVCR.

Every country in the world, including the EU will be able to distant sell into the UK with the customer paying the VAT & Duty.
The postman will become the VAT collector for every distant sold package sold into UK.
Prices for all non UK sellers, with stock located outside the UK on Amazon.co.uk will be displayed without VAT at 20% cheaper.
All goods under £15 from non UK retailers will be sold VAT free and have a 20% price advantage.
Non UK sellers will move their stock currently in Amazon UK to Amazon warehouses in the EU and have their UK VAT Free orders fulfilled by Amazon in the EU.
The new Customs Declaration Service (CDS) will have to cope with an additional unprecedented 90 million to 390 million declarations a year by 2019
Chinese owned fulfilment houses in Calais will flourish with Overseas Sellers being able to take orders, drive them 32 miles through the channel tunnel and dispatch them into the UK Royal Mail service on the same day.
UK Retailers will have to register for VAT in the EU if they want to continue to cross border trade with EU customers.
UK retailers will no longer be able to compete on price in the UK and will be killed off
UK retailers will move offshore to Calais to be able to compete in the UK.
We will see the same LVRC abuse that occurred in the Channel Islands but this time on a global scale.
Chinese sellers will be able to sell VAT Free goods dispatched from China cheaper than the stamp it would cost to send the goods from the UK.

Destination based VAT system

The EU understands that the current 21 year old VAT system is archaic and not fit for purpose with the rapid expansion and globalisation of eCommerce Cross border trading.

The EU is introducing a destination based VAT system for physical mail order goods, having already successfully implemented the system with downloadable goods. The EU estimates that as much as EUR 25 billion in trade (25% of total cross-border B2C sales of goods) is non-compliant.

The new EU VAT Regulations extends to all overseas online retailers distant selling from outside the EU. This means ALL Chinese online retailers who distant sell into the EU will have to register for VAT and pay VAT in the EU. Currently a Chinese Seller can distant sell into the EU without charging VAT. The VAT & Duty is collected from the customers who purchased the goods. A recent study showed only 35% of VAT is collected via Postal operators on eCommerce Imports.

The new Customs Declaration Service (CDS) will not be able to cope with the additional unprecedented 90 million to 390 million declarations a year, as all EU goods will be classed in the same as way as imports and exports from third countries.

The old distant selling system has been open to a mass of abuse with Overseas miss-declaring the goods as gifts and valuing them as little as 1% of their true value in order to gain LVCR on the goods so no VAT or Duty is collected at all.

If the UK government adopts a destination based VAT system in conjunction with introducing the VAT spilt payment system it would help put an end to Online VAT Fraud by UK & Overseas Sellers. It would also put an end to the difficulty of collecting the correct amount of VAT due from Distant Sellers.

Scrap LVCR – Low Value Consignment Relief

The EU has scrapped LVCR due the abuse and market distortion it is causing.

LVCR is a relief from VAT on goods imported into the EU with a value of £15 or less. Goods dispatched by Overseas Online Retailers from outside the EU to customers in the UK can be sold VAT free as long as they are valued under £15.

Overseas Online Retailers are abusing LVCR by under declaring the value of the goods so no VAT or Duty is paid. We have evidence of goods being declared at 1% of true value by Overseas Online Retailers on Amazon and eBay. The scale of this fraud is huge; there are 1000’s of Overseas Online Retailers on Amazon and eBay distant selling into the UK.

LVCR is already causing a huge market distortion on price and competitiveness against UK retailers competing with overseas retailers who have a completely legal 20% price advantage on goods they sell to UK customers on UK Online Marketplaces.

If the UK government don’t scrap LVCR post Brexit, every European & overseas business will have a 20% price advantage right on our door step. This will be the Channels Island VAT Loophole all over again, this time on a global scale. At the time HMRC refused to close down the LVCR VAT abuse seen in the Channel Island and it took a High Court Ruling to get it closed down.

By scrapping LVCR and in conjunction with introducing the VAT split payment system, low value goods will remove the abuse and market distortion it causes. It will also remove the burden LVCR causes to UK Customs and Customs Declaration Service.

Stop subsidising Chinese post via UPU terminal dues.

Chinese sellers are being offered hugely subsidised postal services known as “Terminal Dues” by the United Nation’s Universal Postal Union (UPU) allowing Chinese retailers to sell goods including postage from China to the UK for less than the stamp would cost a UK retailer to send the same item from the UK.

For instance a set of football shin pads on eBay can be purchased for as little as £1.50 including express delivery from China to the UK. They will also be VAT Free under LVCR.

To send the same football shin pads from the UK would cost £2.58 for a Royal Mail 2^nd Class package stamp. If a UK retailer sold the shin pads for £1+VAT plus delivery the total cost would be £3.78. That is more than 2.5 times the price the Chinese seller is able to sell the same product to the same UK consumer.

When the Chinese packaging enters the mail system in the UK it is handled like any other package and it is costing the UK Postal Service of tens of £millions each year, which translates into costs for U.K consumers.

It not only disadvantages UK retailers in their competition with Chinese Retailers, it costs the U.K government millions of pounds in lost customs revenue.

The UK government must stop the United Nation’s Universal Postal Union (UPU) “Terminal Dues” subsides for Chinese Online Retailers.

Conclusion

If the government took on board all our recommendations it would:

Level the playing field for UK Online Retailers
Increase VAT revenues
Decrease the burden on Customs and Excise for distant sold goods
Decrease the burden of the Postman collecting VAT
Remove market distortion caused by LVCR and Universal Postal Union Subsidises

If the government introduced VAT ‘split payment’ model without implementing our recommendations the only VAT it would collect is from UK retailers because all non UK retailers will have moved 20.7 miles off shore and would distant sell from outside the UK.

In our opinion it would be foolish if the government did anything else other than implement our recommendations.