In the second of a two-part series, Croner-i tax writer Sarah Kay looks at some of the less well publicised VAT consequences of the UK leaving the EU on 31 December 2020, including the tour operators margin scheme, online sales and overseas marketplaces
As previously discussed in Brexit and VAT pt1, with only two months remaining until the transition period ends and the UK fully leaves the EU, preparations for Brexit are becoming ever more important. In terms of VAT, this will have far reaching consequences businesses which trade with the EU and in many cases the outcome for business is the same or similar, deal or no-deal.
- Tour Operators Margin Scheme (TOMS)
Under TOMS, businesses which buy in and resell travel services, such as hotel accommodation and flights, account for VAT using a margin scheme. In summary, these businesses do not recover VAT incurred on their cost of sale and, instead, account for VAT on their margin according to the member state in which they are established.
Thus, a UK travel company accounts for UK VAT on the margin made on EU travel and the margin made on non-EU travel is zero rated. Although it is widely disliked, the scheme greatly simplifies VAT accounting for tour operators and holiday companies.
HMRC’s guidance (which has not been updated since 2019) is that after the transition period, from a UK perspective, TOMS will still apply and that:
• UK tour operators should continue to apply the margin scheme calculation;
• the margin made on UK travel will be standard rated; and
• the margin made on all non-UK travel will be zero rated (ie, EU travel will be taxed in the same way that non-EU travel is at the moment).
However, the correct VAT treatment from an EU perspective is far from clear. The rules are not fully harmonised, there are variations in the way EU member states treat non-EU travel companies and there are variations in the services which are and are not covered by the TOMS.
Potentially, UK tour operators may be required to register in some or all of the member states where they sell travel services.
However, in practice, most EU member states do not assess for VAT non-EU tour operators that are selling holidays in their countries. In some cases, this may be because, in the member state’s view, TOMS applies to all tour operators whether they are EU or non-EU (a view not shared by the EU Commission).
But it may also be because, from a pragmatic perspective, pursuing overseas businesses for VAT is costly and could deter travel companies from selling holidays in that country.
Member states may be prepared to forgo the VAT due on the sale of a holiday because the VAT charged by the local travel providers, like hotels, cannot be recovered as input tax and they collect tax on the revenue generated by tourists when they visit.
The EU VAT rules which will apply to UK tour operators selling travel in the EU are thus unclear at the moment and such businesses need to monitor the situation closely.
- Mail order/internet sales to EU consumers
Many UK businesses sell goods to EU consumers through mail order or internet sales via their own ‘shop front’, such as a website or magazine, or through an online marketplace. Sales of goods which are delivered to a consumer in another EU territory are called ‘distance sales’.
Distance sales are subject to VAT in the territory of delivery, but only if the supplier is registered there. Suppliers may register voluntarily or they may be required to register because their sales exceed that country’s distance selling threshold (registration thresholds for distance sales are either €100,000 (£90,590) or €30,000 per annum (or local currency equivalent)).
If the supplier is not registered in the consumer’s territory, the sale is subject to VAT in the supplier’s territory. Thus, many UK businesses selling to EU consumers charge UK VAT, and delivery is straightforward because the goods are moving within the single market.
After transition, these distance sales will be exports from the UK and imports into the EU. UK suppliers will need to remember that:
• in most EU territories the registration threshold for non-established suppliers is nil;
• the goods will need to clear customs when they arrive in their destination member state and import VAT, and possibly customs duty, will be due;
• most such goods are delivered by post and, unless the supplier has arranged to pay the import VAT (and possibly Customs duty) in advance, the local post office may withhold the parcel until the customer has paid the import taxes due;
• there may be reliefs from import VAT and duty for some low value consignments; and
• if they use an online marketplace, they may be asked for additional information as, increasingly, online market places are being held liable for VAT due on sales made via their platforms (see below).
Businesses selling goods to EU consumers need to review their business and assess how Brexit will impact them and their particular supply chain.
- Overseas online retailers and online marketplaces
In recent years concern has been growing across EU governments that overseas retailers are selling goods to EU consumers without accounting for VAT that is properly due.
Many overseas retailers use an online marketplace and, since 2018, online marketplaces have been required to undertake checks on the retailers using their platforms and can be held jointly and severally liable for VAT due on sales.
After 31 December 2020 new rules will apply to sales by overseas retailers to UK customers. In summary:
• Goods delivered to the UK
- Consignments of no more than £135 in value will be subject to import VAT at the point of sale and the overseas retailer or, if used, online marketplace will be liable to account for this.
- Consignments exceeding £135 in value are subject to the normal rules at import, i.e. the overseas retailer will need to declare them to customs and pay import VAT etc.
• Goods already in the UK at point of sale
- If the overseas retailer sells them directly, they should already be registered for VAT, there will be no change to the existing rules on 31 December.
- If sales are made via an online marketplace, the online marketplace will be liable for the VAT due on sale. The overseas retailer will be deemed to make a zero-rated sale to the online marketplace when the goods are sold, this will enable them to register for UK VAT and recover VAT incurred on their costs.
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About the author
Sarah Kay is a tax writer at Croner-i