For many of us, in both a professional and personal capacity, keeping up with the fast moving digital world is a constant struggle and as we watch the next generation deal almost entirely on-line with such ease, we are reminded that e-commerce is the future.
Therefore it is in some ways comforting to know that tax authorities and legal draftsmen are also in a struggle to keep up and make tax legislation fit for purpose in the 21st century. In light of this, the European Commission and the U.K. Government are considering initiatives to tackle several VAT problems caused by this internet boom.
Current rules as set out in the VAT Directive (Council Directive 2006/112/EC) were agreed between all European Union (EU) Member States well before the rise of the internet and subsequent exponential increase in online sales. As such, it is unsurprising that the existing rules do not deal effectively with VAT in a number of areas. These include a prohibitive compliance cost in dealing with VAT obligations for suppliers, a loss of revenue for Member States due to online fraud (estimated to reach 7 billion euros ($7.9 billion) by 2020), and distortions of competition through the abuse of reliefs for imported goods of low value.
It is to be welcomed that both the UK Government and European Commission have made recent announcements in this area in an attempt to update and improve already obsolete tax legislation. This will not only simplify matters for traders and consumers, but also help to address the issue of widespread fraud. In addition, specific rules relating to online marketplaces, through which as much as 75 percent of all international trade to EU consumers is effected, are likely to be introduced in the future to ensure that the operators of the sites take some responsibility for the traders operating through their platforms.
The current rules operate so that when a consumer purchases goods online the onus is entirely on the supplier to apply, collect and account for VAT to the local tax authorities within the EU. For a compliant business based in the EU this may involve registering and accounting for VAT in a number of EU countries where the consumers reside. This involves an ongoing compliance obligation, which the European Commission calculates as costing businesses as much as 8,000 euros per year, and per country in which they sell. For smaller businesses and start-ups, this is prohibitive. This is also at odds with suppliers of digital services who benefit from a 'one stop shop,' whereby they are able to register for VAT in their own country and remit all tax collected on one return to their own tax authority, which is then distributed to the correct Member State by the tax authority.
For a non-compliant business, particularly one established outside the EU, it is not difficult to envisage the opportunity to charge VAT, and then not account for the receipt to the local tax authority. This results in both revenue loss for the relevant tax authority and distortions of competition, to the detriment of legitimate businesses.
The proposals aim to create a simplified system for VAT application attached to the online cross-border sale of goods, and one that therefore allows suppliers to mirror the one stop shop that exists for services. The Commission expects that this will reduce compliance costs for 95% of online businesses. In addition, thresholds for micro-businesses and start-ups will be introduced, so that in the early stages of growth, or if the company remains small enough, there will not be a requirement to charge anything other than domestic VAT at the local rate — that is, all sales are treated as taking place in the home country and it is not necessary to use the one stop shop mechanism.
It is also expected that legitimate and compliant non-EU businesses will welcome the chance to be able to apply to become authorized users of the one stop shop as, following approval, it will also significantly reduce their compliance burden.
By legitimizing sellers through registration for the one stop shop, it should become easier for the tax authorities, and for consumers, to recognize potential non-compliance. This is a further move towards prior approval, with which businesses who had to apply to become Authorized Economic Operators last year will be familiar.
As usual, there are benefits attached to being an approved operator, and in this case the principal benefit relates to the importation of low value items. As consumers, it is very likely that we have taken advantage of the fact that we can import goods from outside the EU, VAT and duty free, provided the value is under 22 euros; and it was popular to use this concession through companies based in the Channel Islands. Many online businesses have long lobbied for the removal of the concession as it is a widely-held view that it has always been open to abusive practices which cause unfair distortions in competition for those based entirely within the EU.
In addition, as the digital world shrinks and valuable items become smaller and lighter, it has become easier for large-scale avoidance to occur, as it is very easy to supply an expensive item and describe it as being something else with a value of less than 22 euros.
In view of this, the European Commission is seeking to remove the limit and replace it with a consignment allowance of 150 euros, but only for those trusted non-EU traders who register for the one stop shop. Such consignments would no longer be stopped at customs for VAT clearance, and the collection of VAT will be managed on a self-assessment basis. At a stroke, this removes the low value items relief from the fraudster's armoury, and gives preferential treatment to the pre-authorized legitimate businesses. A further significant blow to fraudsters should come in 2021, when all sales from non-EU suppliers to EU consumers will be subject to VAT anyway, so the ability to buy VAT-free from outside the EU will end at that time.
The final measures being considered relate to online marketplaces, which is where most of the UK trade with EU consumers occurs.
The UK Government introduced measures in 2016 which allow HMRC to hold the operator of the online marketplace liable for VAT which has not been paid by an overseas supplier who has supplied goods to a U.K. customer. In addition, HMRC can seek security from an overseas trader and also require that a trader appoint a U.K.-based VAT representative who is then responsible for the trader's VAT.
The European Commission is also considering moving more of the administrative burden associated with VAT compliance onto the marketplace operators, and could require that they are responsible for the collection of VAT on sales made through their platforms; however this measure is only under consideration at present.
At present, businesses who sell online to consumers in the EU should welcome these measures, as they should see a decrease in compliance costs. Those that have been deterred by the thought of multiple VAT registrations throughout the EU can perhaps revisit their strategies, knowing that VAT compliance will be much simplified.
Of course, much will depend on the outcome of the UK's negotiations with the European Commission with regard to the U.K.’s exit from the EU, as U.K. operators will be seen as non-EU suppliers. As such, the requirement to apply for and become an authorized user of the one stop shop will be an operating necessity and this will require the appointment of an agent in each relevant EU country to deal with the ongoing VAT compliance.
Businesses should be considering where their main point of import into the EU might be in the future and be aware that thousands of businesses will be in a similar position. In all cases, proactive early steps to identify a suitable course of action would be advisable.
This article first appeared in Bloomberg BNA's Tax Planning International Indirect Taxes Journal, June 2017.