Today is the deadline for stakeholders to submit their observations on a proposed system to extract VAT on online sales in real time using payment technology and depositing it with HMRC.
The call for evidence can be found here: https://www.gov.uk/government/consultations/vat-tackling-fraud-on-goods-sold-online-update-on-split-payment
Such an alternative collection method would allow to tackle VAT evasion by overseas e-commerce merchants, particularly those selling via marketplaces. HMRC estimates that the losses from overseas businesses selling goods to UK consumers via marketplaces was £1-1.5 billion of VAT in 2015-2016.
However, such a system could be very burdensome for overseas merchant from a financial standpoint.
We can make an example
1. An U.S. merchant imports products for a declared value of £1,000. Import
VAT: £200. (For sake of simplicity, we are not factoring Customs duties).
2. In the first month, the U.S. merchant sells goods for a retail VAT-inclusive
value of £1,200 (assuming retail price is fourfold the wholesale value).
VAT withdrawn at the point of sale under the new system would be: £200.
3. The merchant is subject to a 10% referral fee from Amazon, calculated on the
VAT-inclusive price (EC reverse charge), deducted from disbursements: £120.
4. Also, in the same period, products worth 20% of the turnover are returned under
the cancellation right. Return rates can be very high in e-commerce. By law, the
merchant must refund the purchase price within 14 days from receiving the item
back. The merchant is thus called to refund 20% of the VAT-inclusive turnover:
5. Moreover, the U.S. merchant needs to pay other fees to Amazon (£50) for the
Import VAT can be recovered quarterly, while output VAT is withdrawn at the
point of sale. And for merchants using the annual accounting scheme, even worse.
VAT inclusive sales: £1,200 minus
Import VAT (pro rata): – £200 minus
VAT withdrawn at the point of sale under the new system: £200 minus
Amazon referral fee (withdrawn at source): £120
Refunds on product returns: £240
Other Amazon fees: £50
Over 67% of the revenues made via the marketplaces on 25% of the stock would not
be received or retained by the merchant.
Furthermore, we have not accounted for:
1. the wholesale price paid by the US merchant to buy its stock;
2. the shipping charges to transfer the stock from the US to the UK warehouse;
3. Customs duties;
4. other general expense;
5. income taxes.
This “textbook” example should be able to convey the idea of how a straight 20%
deduction of VAT at the point of sale would be almost unbearable for overseas
merchants in the trading process.
In our opinion, if the United Kingdom decides to implement a split payment model
for VAT, the withheld VAT-amount should at least be lower than 20%, perhaps 10%, or,
merchants should be allowed to recover import VAT more frequently.