HMRC tightens distance selling VAT rules

29 August 2017

HMRC has adopted EU proposals to extend distance selling rules to online or mail order sellers of goods who promote a separate delivery service to their customers. Vendors should urgently review their VAT position.

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 to a recent update of its guidance (which it has not yet widely publicised), HMRC has  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 states.

What does this mean for vendors?

UK internet and mail order businesses that have adopted such delivery arrangements are now at risk of HMRC concluding that their supplies are distance sales. 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.

Further Developments

This issue is expected to be considered by the courts in a case brought by sportswear retailer, Sports Direct. Sports Direct has appealed to the First-tier Tax Tribunal in response to HMRC’s decision that its delivery arrangements for online sales to consumers in other member states constitutes distance selling.

The tribunal in this case may decide to refer to the Court of Justice of the European Union for guidance on how the term ‘dispatched or transported by or on behalf of the supplier’ should be interpreted. However, this litigation began in 2016 and may take some time to reach a conclusion. The long term position could also be further complicated by the UK’s impending departure from the EU, and the EU’s own VAT Action Plan, which proposes to scrap the distance selling system altogether in 2021.

In the meantime, the fact that HMRC has extended the scope of distance selling in written guidance suggests that it intends to actively pursue its new policy with operators in the e-commerce sector. 

Businesses selling goods online or by mail order to EU consumers should therefore take immediate action to review their position.

For further information or assistance, please get in touch with your usual BDO contact or one of our VAT specialists listed above.