Impact assessment

HMRC impact assessment for the VAT treatment of low value parcels

Published 25 February 2019

Section A: Background

Introduction

Leaving the EU without a negotiated settlement is not the government’s preferred outcome, but it is essential that the UK is prepared for all possible eventualities on customs, VAT and excise arrangements. While the government expects the negotiations to produce a mutually beneficial outcome, it is prudent for both government and businesses to make contingency plans for a ‘no deal’ scenario, in which the UK leaves the EU without a negotiated arrangement.

As part of those preparations, the government has issued guidance on GOV.UK for businesses and their advisers on customs, VAT and excise procedures that are likely to apply in a ‘no deal’ scenario, as well as letters to 145,000 businesses trading with the EU only, telling them what they need to do to get ready. The government is also developing the legal framework needed to underpin these processes and procedures, in order to deliver on its commitment to provide stability for citizens, consumers and businesses.

The document, ‘HMRC impact assessment for the movement of goods if the UK leaves the EU without a deal’ published on 4 December 2018 advised that additional impact notes would be published as further customs, VAT and excise regulations were laid. This note covers the impact of changes to how import VAT will be accounted for on goods valued at £135 or less entering the UK in parcels in the event of the UK leaving the EU with no agreement. The comparison is against existing treatment. The note includes:

• Section A: Background
• Section B: Detailed impacts

The changes being introduced

The Taxation (Cross-border Trade) Act 2018 (TCTA 2018), which received Royal Assent on 13 September 2018, introduces a number of powers, including the power to make provisions in relation to any customs duties, VAT or excise in consequence of or connected with the UK’s withdrawal from the EU.

This impact note sets out the impact of changes made by the Value Added Tax (Postal Packets and Amendment) (EU Exit) Regulations 2018, laid before Parliament on 18 December 2018. The Regulations make an overseas supplier who sends parcels containing goods valued at £135 or less to the UK responsible for paying any import VAT that is due on the goods. It also removes Low Value Consignment Relief (LVCR) which relieves import VAT on commercial imports of goods valued at £15 or less.

For the purpose of the Statutory Instrument and this Impact Note, parcels are defined in law as postal packets which includes letters, parcels, packets or any other article and consignments that could be sent by post even if they are sent by different means.

The definition of a ‘parcel carrier’ is wide – it covers any person who carries parcels from one place to another or who receives, collects, sorts or delivers parcels. This includes, for example, fast parcel operators, express couriers, freight carriers, and the universal service provider (in the UK, this is Royal Mail). A parcel must be capable of being sent by post but this does not mean that the definition of a parcel is limited to parcels which are in fact transmitted by universal service providers.

Before 29 March 2019

Current rules for supplies of goods between businesses and from businesses to consumers sent as small parcels between EU member States mean:

• Customs duty is not due on any cross-border movements of goods within the EU.
• Business to Consumer – VAT is normally due in the EU country where the goods are sent from. The exception is where a business exceeds the annual ‘Distance Selling’ threshold of the country where the goods are sent to. If the UK’s £70,000 threshold is exceeded, the business must register and account for VAT in the UK.
• Business to Business – VAT is accounted for through the normal periodic VAT return by the receiving business.

The position is different for goods sent to the UK from outside the EU. They may be liable to customs duty or import VAT unless reliefs apply. Customs duty is relieved on commercial imports of goods valued at £135 or less (except those that contain excise goods – alcohol, tobacco or perfume). Low Value Consignment Relief (LVCR) relieves import VAT on commercial imports of goods valued at £15 or less. LVCR does not apply to excise goods or to goods ordered from the Channel Islands.

The liability to pay customs duty and import VAT on parcels sent from outside the EU lies with the UK declarant (normally the parcel carrier) or the UK recipient. The overseas supplier may choose to pay the import VAT and duty to the parcel carrier or the parcel carrier will request reimbursement from the UK recipient on delivery.

What happens in a ‘no deal’ scenario?

The document ‘HMRC Impact Assessment for the movement of goods when the UK leaves the EU’ referred to the costs that will be incurred by parcel carriers in submitting customs declarations for UK-EU parcels (on behalf of the recipients of those parcels).

The purpose of the Statutory Instrument is to help ensure the flow of parcels into the UK while maintaining tax revenue in the event that the UK leaves the EU without a negotiated settlement. It:

• removes the VAT relief for imports up to and including £15 (LVCR). This protects the UK high street from unfair competition from overseas sellers being able to sell low value goods into the UK free of VAT. The risk of this would increase after withdrawal given the close geographical proximity of some EU member States, which allows goods to be delivered to the UK relatively quickly. Removing LVCR will increase the number of parcels on which import VAT will have to be collected, and therefore the potential additional burdens on parcel carriers.
• transfers the liability for payment of import VAT on goods up to and including £135 from the UK customer to the overseas seller.

This means that import VAT will be due on all goods entering the UK as parcels sent by overseas businesses, irrespective of value (unless they are already relieved from VAT under domestic rules, for example zero-rated children’s clothing).

To manage the expected increase in the number of parcels requiring import VAT to be collected, for parcels up to and including £135, HMRC will provide an online service to enable overseas businesses selling the goods in the UK to declare and pay the import VAT that they owe.

The government has published details of this measure on GOV.UK explaining what would happen to VAT procedures on 29 March 2019 in the event of a ‘no deal’ scenario. See the pages on VAT for businesses and the Partnership pack: preparing for changes at the border after a ‘no deal’ EU exit.

Policy Objective

In the event of the UK leaving the EU without a negotiated agreement, it is vital to keep parcels moving and maintain revenue flows. The provisions in the Value Added Tax (Postal Packets and Amendment) (EU Exit) Regulations 2018 aim to achieve this by making overseas sellers responsible for the payment and accounting of import VAT on parcels containing goods that are valued at £135 or less.

In the 9 October 2017 White Paper ‘Customs Bill: legislating for the UK’s future customs, VAT and excise regimes’ the government pointed to heightened tax erosion if goods imported in post from EU countries were to enjoy LVCR following the UK’s exit from the EU, as has applied to goods from the rest of the world.

The measure takes account of these concerns and supports a fairer tax system through an equal application of VAT to imported goods with those bought from UK-based businesses. Establishing a level playing field for retailers aligns the UK with the global direction of travel on abolishing tax reliefs on low value consignments. For example, the Organisation for Economic Cooperation and Development (OECD) provided impetus for tax reform in its October 2015 report ‘Addressing the tax challenges of the Digital Economy’.

This is one of a number of Statutory Instruments to ensure the UK has a VAT system which operates as required on leaving the EU.

Section B: Detailed impacts

The Value Added Tax (Postal Packets and Amendment) (EU Exit) Regulations 2018 laid before Parliament on 18 December 2018, make an overseas supplier who sends parcels to the UK containing goods valued at £135 or less responsible for paying any import VAT that is due. Overseas sellers may discharge their liability by either:

• registering with HMRC and paying any import VAT due on a periodic return; or
• paying the import VAT due to the parcel carrier who will make a payment to HMRC on their behalf.

The legislation therefore:

• places a liability to pay import VAT on overseas sellers, and establishes a new online registration service and accounting system to enable the overseas supplier to discharge their liability. Each registered supplier will be issued with an ‘import VAT on parcels’ reference (unique identifier) which will be used to demonstrate that import VAT will be declared through the online system. In the context of the online service a parcel carrier includes anyone who conveys a parcel.
• provides an alternative to the requirement to register where the import VAT on a parcel is paid to a parcel carrier. It includes a requirement for an overseas supplier to retain proof of the arrangement with the parcel carrier. The parcel carrier will be jointly and severally liable for the import VAT due on the goods in these circumstances.
• provides that where parcels are sent without a parcels reference through a universal service provider the UK recipient will be held jointly and severally liable with the overseas seller for the import VAT due on the goods.
• allows HMRC to advise online marketplaces of non-compliance by overseas sellers. Where a marketplace continues to facilitate deliveries by a non-compliant overseas supplier it can be held jointly and severally liable for import VAT due in the future.
• makes the UK recipient jointly and severally liable for the import VAT where they know or reasonably should have known that the supplier has made an incorrect declaration of the value or type of goods etc.
• applies a penalty on overseas sellers for failure to register.

Exchequer Impact

In the event there is not a negotiated settlement with the EU, final costings will be produced and would be subject to scrutiny by the Office for Budget.

Economic impact

The government has fulfilled its commitment to provide economic analysis of different EU exit scenarios to parliament by publishing its Long-term Economic Analysis on the 28 November 2018. The published analysis sets out the long-term economic impact of changes to the UK’s trading relationships under different EU exit scenarios against current arrangements. The analysis includes a modelled no deal scenario which captures the economic effect of this outcome, including the costs and frictions from changes to customs arrangements.

Equalities Impact

We do not anticipate that there will be any equalities impacts on groups with protected characteristics.

Impact on individuals, households and families

The removal of LVCR means that goods valued at £15 or less purchased from overseas will be subject to VAT in the same way that purchases on the UK high street are. Goods may attract other reliefs, such as the zero rating for children’s clothing. The overseas supplier will be responsible for paying the VAT to HMRC through the online service. This is different to the current process for non-EU parcels over £15, where the parcel carrier collects the VAT from the UK recipient before they deliver the goods. However, where the overseas supplier is not compliant, the UK recipient may be held jointly and severally liable for the import VAT due on the goods, with the VAT collected in the same way as the current approach for parcels over £15. This measure is not expected to impact on family formation, stability or breakdown.

Impact on business including civil society organisations

Overseas sellers carrying on a business which sell goods to the UK will incur one-off costs of familiarisation with the new rules and training for staff. If a supplier chooses to always pay the import VAT due through a parcel carrier there will be negligible one-off costs. Otherwise, there will be negligible one-off costs of registration with HMRC and developing the required reporting framework to complete the import VAT returns. For this latter group there will also be significant on-going costs related to the periodic returns (completing, filing, payment and amending returns in cases of errors). There may be an additional on-going cost for all overseas sellers of keeping appropriate records although it is expected that businesses will already keep these records as good business practice.

Sellers who register will receive a parcels reference which must accompany each parcel sent to the UK, and there will be an ongoing cost for ensuring this happens.

Parcel carriers will incur significant one-off costs of familiarisation with the new rules, reviewing, revising or creating new business and system processes, and training for staff. They will also incur ongoing costs of distinguishing between parcels with and without a parcels reference and processing them accordingly.

Operational impact (£m) (HMRC or other)

This change requires revisions to existing HMRC systems and processes to link these to the new online import VAT registration, accounting and payments service. The new service has been developed and preparations have been made to support businesses to implement the new scheme and comply, including fielding enquiries from prospective and new registrants. 

HMRC will develop a proportionate compliance approach, in line with other approaches, based on the use of data gathered from multiple sources and the use of relevant existing powers, as well as working with online marketplaces, using the new joint and several liability provision, to drive compliance behaviour among the senders of the parcels selling on their platforms.

Monitoring and evaluation

This measure will be monitored through receipts, import VAT returns and other information collected from HMRC’s systems, as well as through communication with affected taxpayer groups.

Declaration

The Right Honourable Mel Stride MP, Financial Secretary to the Treasury, has read this impact assessment and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.