VAT Post-Brexit: What Online Retailers Need To Know

By Avalara

Image credit: David Dibert

By Richard Asquith - VP Global Indirect Tax at Avalara

2017 is poised to be a big year for Brexit, online retail, and VAT. Brexit plans are soon to be outlined, tax authorities of many countries implementing new regimes for VAT post-Brexit, and developments on the EU VAT Action Plan, to name a few developments.

Three months into 2017, the future may not necessarily be certain, but we have a better inclination of where we could be heading. In some cases, these announcements and proposed regulations are moving progressively forward and in others, we are reverting to policies of the past.

Online retailers — especially those trading cross-border — would be wise to understand and prepare for the upcoming changes. It’s a time of uncertainty, and it’s important to understand and strategies with of whatever dependable information is available.

This article will look at some upcoming developments in online retail around VAT post-Brexit.

Brexit — 19th Century thinking for a 21st Century world

Heading full steam ahead towards a hard EU departure, businesses have started to plan for potential tariffs and additional VAT registrations if the UK leaves the single market and EU Customs Union.

Conversations between the UK Government and manufacturing firms like Nissan, coupled with the announcement of a free trade deal with Canada where tariff reductions have been mentioned, are contributing to the confusion.

Tariffs will always add some cost to international businesses, but they are the lesser problem and a worry of the past. Average tariffs across the major world economies are lower than 4%, and in comparison to the risk posed by non-tariff barriers — €4 bn per annum — they should not be dominating conversations.

There are greater risks associated with non-tariff barriers.  This includes deciding if the UK will adopt the EU’s regimes on testing, safety requirements and product classifications, or the tough licensing and quota restrictions introduced to imports.

Boosting online retail through EU VAT simplification

The unresolved VAT complexities for small online retail businesses operating across the 28 members’ states borders will be the European Commission’s (EC) second biggest objective in 2017. The EU VAT Action Plan, launched last year, is a hugely ambitious initiative to tackle many of the VAT impediments to the EU matching the US’ dynamic online retail ecosystem.

Proposals, such as extending the Mini One Stop Shop (MOSS) single VAT return to B2C goods transactions in 2022 and the single tax authority audit, will be hammered out this year for initial legislative drafting by year end.

More controversially, the EU will seek agreement in 2017 on two controversial areas. Firstly, an anti-VAT fraud proposal to implement the general reverse charge on all B2B transactions above €10,000.  Whilst optional on a state-by-state basis, if introduced, it may well receive widespread uptake. This will place large and complex change requirements on reporting systems.

The proposal will meet some stern opposition from some states who will view it as undermining a key component of the EU VAT regime — the collection of VAT through the production chain.

Secondly, the EU will push for consensus on a definitive VAT regime.  The current system, based on the origin principle with nil-rating on cross border transactions, is complex and subject to widespread fraud.  The alternative, a destination-basis, could mean billions in new VAT collections.

The EC will also allow some more flexibility around setting reduced VAT rates, including reduced rates on ebooks.

Fighting €50 bn fraud with new, live VAT reporting

To cope with the massive amount of VAT fraud across Europe, estimated at €50 billion per annum, countries are now moving towards live reporting to ensure instant access to electronic data on companies’ transactions that they can share internationally to detect and prosecute criminals.

In Europe, there are now 13 member states demanding full electronic lists of sales and purchase transactions — many countries have extended this into inventory movements and bank transactions. Whilst some of these requirements have been harmonised between states around the OECD’s Standard Audit File for Tax (SAF-T), most are on differing reporting formats and schemas.

The outcome of this drive means that tax authorities will soon know much more about companies’ businesses than the CFO. This will mean CFOs will be going into their next audit having to explain transactions and structures they possibly do not fully understand themselves.

VAT extending globally

There are several countries that are implementing new indirect tax regimes this year. In India, an 18% Goods and Services Tax will be launched in July after years of debate and delays. This is a monumental reform for the country, potentially boosting GDP by 2% going forward, but a very complex undertaking to introduce. 

Governments and companies in the six Gulf Co-operation Council states are getting ready for the implementation of Value Added Tax from 1 January 2018.  The new consumption tax has been set at 5% across the region, with agreement on harmonised rules to boost trade.

However, several obstacles remain to get this off the ground, including a lack of local expertise in VAT and with no legislation yet published, it makes for an extremely tight timetable. 

Full steam ahead

2017 is already shaping up to be a busy year for the VAT industry across the world. The outline of the UK’s post-Brexit trading relationship with the EU, and VAT obligations, should emerge by the end of the year.  This risks of the imposition of tariffs and extra VAT obligations is real.

Elsewhere, VAT reforms in the EU and beyond should help companies by reducing reporting obligations and double taxation — implementation of GST and VAT, and requirements for more comprehensive and live reporting can all potentially help usher in progress, stronger growth, and compliance.

So there’s cause for optimism. And when it comes to VAT post-brexit, things could become simpler and easier from an online retailer’s perspective. VAT is a subject that can seem complex and impenetrable, but greater clarity should come shortly.

In the meantime, the obvious best approach is to stay abreast of developments as they unfold. In the first instance, keep an eye on the areas outlined above to inform your strategic decisions. You can also prepare for the general shifts in online retail in 2017 to stay ahead of the curve, and ready for all developments.

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