HMRC’s extension of distance selling rules to online or mail order sellers of goods who promote a separate delivery service to their customers is to be considered by the European Court.
Distance selling in the EU
The VAT distance selling rules apply to online and mail order sales to private customers in other EU member states, where the goods are ‘dispatched or transported by or on behalf of the supplier’. Such businesses must register for VAT in any EU member state to which they deliver goods, where their turnover exceeds the distance selling threshold set by that country – normally €35,000 or €100,000.
Sales below the threshold do not trigger a registration requirement and vendors should instead apply and account for VAT at the rate applicable in the member state of dispatch of the goods.
Alternative delivery arrangements
Until now, some vendors have not fallen within these distance-selling rules because their business has chosen to separate the supply of the goods from the service of delivering them, with the latter task performed by a separate company/provider.
However, according an update of its guidance in 2017 (which was not widely publicised), HMRC changed its interpretation of the term ‘dispatched or transported by or on behalf of the supplier’. HMRC now says that the distance selling rules apply where the supplier ‘intervenes directly or indirectly in the transport or dispatch of the goods’. Examples of this include situations where the vendor subcontracts the transport to a third party who delivers the goods to the customer on his behalf, or actively promotes the delivery services of a third party and/or puts the customer in contact with a third party carrier.
This change of interpretation originates from proposals made by the EU Commission in 2015, which have also been adopted by some other EU member states.
Reference to the European Court
In a recent UK case concerning vitamin and health supplement business, Healthspan, the First-tier Tax Tribunal has decided to refer to the Court of Justice of the European Union (CJEU) for guidance on how the term ‘dispatched or transported by or on behalf of the supplier’ should be interpreted.
The tribunal is now in the process of agreeing the precise wording of the referral, so the CJEU’s final decision in the matter could still be 18-24 months away. However, despite Brexit, the outcome is expected to have at least some impact on e-commerce operators who sell to or from the UK.
While the UK may eventually leave the distance selling regime as a result of Brexit, negotiations between the UK and EU currently propose a transitional period in which the UK stays in the EU single market and possibly under the jurisdiction of the CJEU at least until the end of 2020.
Therefore, the most likely outcome is that a full and binding CJEU judgment will be issued on this matter, and that the UK will continue with distance selling for a while after Brexit. UK internet and mail order businesses that have adopted such delivery arrangements remain at risk of HMRC concluding that their supplies are distance sales.
What does this mean for vendors?
Vendors could face the burden of registering for VAT in up 27 other EU states, applying VAT at the differing rates applicable in those EU countries and having to file multiple VAT returns.
Such distance selling registrations should bring an opportunity for vendors to recover UK VAT previously paid to HMRC on those sales in error. However, the customers’ own member states may require vendors to retrospectively register for VAT in their territories, potentially triggering historic VAT liabilities and penalties that considerably outweigh any VAT repayment due in the UK.
Many vendors have already changed their future delivery models in response to HMRC’s policy change last year. However, any CJEU decision in HMRC’s favour is expected to be applied retrospectively in the UK, so businesses could still be at risk from HMRC challenges in respect of alternative delivery arrangements used in the past four years.
In the meantime, businesses selling goods online or by mail order to EU consumers should review their position. Vendors whose arrangements have already been challenged by HMRC should consider standing over any appeal behind the Healthspan case.
For further information or assistance, please get in touch with your usual BDO contact or one of our VAT specialists listed above.