Sean Turner – VAT Specialist
Whether the UK leaves the European Union with or without a deal on 31st October, preparations for Brexit will continue at pace and businesses across the UK will need to consider the impact across their national and international operations. Following recent developments, we look at two of the key announcements and their impact on UK SMEs.
Plans have been unveiled for 10 free ports in the UK following Brexit. These allow businesses to import and re-export goods outside the normal tax and customs rules and the Government believes they could create thousands of jobs. However, the opposition consider them to be an opportunity for money-launderers and tax evaders.
What are free ports?
Free Ports are designated areas where the usual tax and customs rules and regulations of a country do not apply. Goods can be imported, manufactured and re-exported without checks, documentation and the imposition of taxes or duties and there are an estimated 3,500 Free Ports worldwide, mainly in the Far East. The UK had as many as 7 prior to 2012, when Free Ports were withdrawn, including Liverpool, Southampton and Tilbury.
The EU itself has around 80 Free Ports but they are seen to create unfair competition. Opinion here is mixed around job creation opportunities versus risk of tax evasion and movement of business from one part of the country to another to benefit from tax advantages.
Sea and airports will be able to apply for Free Port status after 31 October.
Low Value Parcels
To assist the flow of parcels into the UK in the event of a no deal, whilst maintaining tax revenue, the Government proposes to introduce changes to how import VAT will be accounted for on goods in parcels valued at £135 or less entering the UK.
The new regulations will:
- Remove VAT relief on imports up to £15, therefore increasing the number of parcels on which import VAT must be collected
- Transfer the liability for payment of import VAT on goods up to £135 from the UK customer to overseas seller
In order to manage the expected increase in the number of parcels where import VAT must be paid, HMRC will provide an online service for overseas businesses to declare and pay the import VAT owed. Overseas sellers may either register with HMRC, or pay the import VAT due to the carrier, for payment to HMRC.
This places a liability to pay import VAT on overseas sellers and provides an alternative to registering where the import VAT is paid to a carrier, although the overseas seller must retain proof of its arrangement with the carrier, who will be jointly and severally liable for the import VAT due.
Additionally, where parcels are sent without a reference through a carrier, the UK recipient will be jointly and severally liable for the import VAT. HMRC will also be able to advise online marketplaces of non-compliance by overseas sellers and if the marketplace continues to deliver for a non-compliant overseas seller, the marketplace can be jointly and severally liable.
Current Industry Concern
We have heard from industry that very few companies have registered for the online system for Low Value Parcels, stating that the liability for import VAT has been shifted overseas, affecting HMRC’s ability to enforce VAT compliance obligations, whilst forcing freight forwarders and customs brokers to become jointly and severally liable. Industry had warned HMRC that this would happen.
In addition, there are industry concerns over misleading guidance published on use of a single Economic Operator Registration and Identification (EORI) number in the UK and Transitional Simplified Procedures (TSP) and the lack of detail around submission of supplementary declarations, untried systems and communication links between parties not yet established.
As we get nearer to 31 October, businesses in the transport and logistics industry involved in the regular movement of goods in and out of the UK, should be alert to the latest news and guidance from HMRC. We understand that EORI numbers are now being automatically issued to VAT registered businesses that trade in goods with the EU, whereas previously, the backlog on EORI applications was understood to be months. HMRC has written to applicable businesses to make them aware of the EORI number allocated to them.
The use of Free Ports may certainly be advantageous for some businesses and we will update as and when we hear more. Carriers and freight forwarders should be aware of the changes for Low Value Parcels, particularly where they might be held liable in certain circumstances and if the appropriate due diligence checks are not in place.
Carriers should look to introduce procedures including obtaining evidence that overseas sellers have registered with HMRC to pay import VAT and the use of the seller’s ‘parcels reference’ on packages. Where overseas sellers are unable to provide evidence of registration with HMRC, carriers should consider what steps need to be taken to protect their position. Carriers should consider carefully whether they are willing to accept the risk of joint and several liability, where the import VAT is paid to the carrier by the overseas seller and how that risk can be managed. Agreements and/or standard terms & conditions should be reviewed to protect against this in the event that the customer is non-compliant. There is also the possibility of carriers not dealing with overseas sellers that are not registered with HMRC in order to protect their position.
All this said, we still do not know where we will be on 31 October and it is clear that HMRC’s proposed measures are being met with mixed reception throughout the transport and logistics industry. We will continue to update through the usual channels as more information and guidance is issued by HMRC.