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Documents considered by the Committee on 30 January 2019 Contents

7VAT rules for online shopping

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the Business, Energy and Industrial Strategy Committee, Digital, Culture, Media and Sport Committee, Northern Ireland Affairs Committee and Treasury Committee

Document details

(a) Proposal for a Council Directive amending Council Directive 2006/112/EC as regards provisions relating to distance sales of goods and certain domestic supplies of goods; (b) Proposal for a Council Implementing Regulation amending Implementing Regulation (EU) No 282/2011 as regards supplies of goods or services facilitated by electronic interfaces and the special schemes for taxable persons supplying services to non-taxable persons, making distance sales of goods and certain domestic supplies of goods; (c) Proposal for a Council Directive amending Directive 2006/112/EC as regards introducing certain requirements for payment service providers; (d) Proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards measures to strengthen administrative cooperation in order to combat VAT fraud.

Legal base

(a), (c) and (d) Article 113 TFEU; (b) Article 397 Directive 2006/112/EC. (a)—(d) unanimity.

Department

Treasury

Document Numbers

(a) (40259), 15471/18, COM(18) 819; (b) (40260), 15472/18, COM(18) 821; (c) (40264), 15508/18 + ADDs 1–2, COM(18) 812; (d) (40263), 15509/18, COM(18) 813

Summary and Committee’s conclusions

7.1Under the European Value Added Tax Directive,57 the rules on treatment of VAT on business-to-consumer sales between EU Member States add up to a complex system. The supply of such goods and services can be taxed in either the Member State of the seller or of the buyer, depending on the nature of the product and, for goods, the value of sales made by the supplier.

7.2To rationalise the EU’s VAT treatment of goods and services bought via the internet, EU Finance Ministers in December 2017 unanimously adopted reforms to the EU’s VAT rules as they apply to distance sales of goods and services to consumers, including online shopping. The most substantial elements of the new VAT legislation for e-commerce are not due to take effect until January 2021.58 As set out in more detail in our Report of 22 November 2017 and in ‘Background’ below, these changes will alter the way in which EU businesses account for VAT on sales of goods and services to customers based in another Member State by:

7.3In December 2018, the European Commission produced proposals for implementing rules to ensure smooth rollout of these changes for both businesses and EU governments in early 2021. These draft rules set out the technical detail of the functioning of the One Stop Shop VAT accounting mechanism for all cross-border intra-EU sales to consumers; the conditions under which online platforms like Amazon would have to account for VAT on sales to consumers where a good is bought from a non-EU supplier;62 and a supplementary anti-fraud proposal with new record-keeping obligations on transactions between businesses and consumers that could help tax authorities identify potential VAT evasion on B2C sales.

7.4The Government has told us that the Commission proposals represent a “major development in the taxation of intra-EU and cross border business”, and the Treasury will work to “ensure that the rules meet the balance between being workable for business and Tax Administrations without too great a burden, and ensuring that revenue is safeguarded”.63 With respect to the proposal to retain and analyse payment transaction data, the Government has expressed concern about its practical implications and, by extension, its efficacy (especially where a consumer uses a payment service provider based outside of the EU).

7.5Despite these concerns, and the UK’s scheduled departure from the EU in March 2019, the proposals remain potentially relevant for British businesses and HM Revenue & Customs. Under the UK’s draft Withdrawal Agreement, it would remain bound by EU legislation for the duration of a post-Brexit transitional period which could potentially last until 31 December 2022.64 These new rules could therefore have to be implemented in the UK, even though the Government is due to lose its veto over them on 29 March 2019.

Our conclusions

7.6We thank the Financial Secretary (Rt Hon Mel Stride MP) for the information provided on the European Commission’s implementing rules for the EU’s VAT treatment of goods and services bought online by consumers.

7.7These proposals are highly complex, but are likely to have a significant impact on both EU and non-EU businesses who sell products to consumers within the European Union. Given the complexity of the proposals, especially in relation to the new VAT responsibilities of online marketplaces, we anticipate changes to the legal texts are likely before they are formally adopted. The Member States themselves have also anticipated that agreeing on the implementing rules may take so long that the entry into force of the changes may have to be delayed from January 2021 to a later date.65

7.8The precise impact of the changes to the VAT treatment of business-to-consumer distance sales for UK businesses, and HM Revenue & Customs, are not yet clear. As we noted in our Report of 5 September 201866 on changes to the EU’s VAT legislation for cross-border business-to-business sales, this is the case virtually all proposed reforms of the EU’s VAT system currently under negotiation in Brussels. Such changes are being discussed not only for B2C sales, but also business-to-business transactions, the VAT responsibilities of small businesses, and the flexibility that individual EU countries have to set domestic VAT rates.67

7.9If the draft Withdrawal Agreement is eventually ratified despite Parliament’s initial vote to reject it, EU law—including VAT legislation—will continue to apply in the UK until at least December 2020 and potentially until the end of 2022. During this transition period, UK businesses will retain access to the current Mini One Stop Shop (as well as its expanded version as and when it becomes operational) by virtue of their UK VAT registration. The Government would be required to transpose changes to the VAT Directive into domestic law, even if those changes were agreed at EU-level after the UK ceases to have the veto over new European tax legislation (which it currently has as a Member State).68

7.10After the end of the transition, British businesses would cease to be able to use the distance-selling threshold to pay VAT domestically on sales to the EU (although this threshold is any event being reduced to €10,000 of sales by January 2021). In addition, British VAT registered-businesses would automatically cease to be eligible for access to the OSS unless a new legal agreement to that effect had been concluded with the EU. We note in this respect that no non-EU country has direct access to the One Stop Shop at the moment: ‘third country’ companies have to register for VAT in a Member State (the ‘non-Union scheme’) and access the One Stop Shop that way. That will also by default be the only option for British businesses wanting to sell to EU consumers and account for VAT via the OSS. However, non-EU firms’ usage of the OSS for sales into the EU will be limited to VAT goods worth €150 or less, or electronically-supplied services. The full One Stop Shop accounting simplification mechanism will be available only to EU-based businesses.

7.11The UK’s departure from the One Stop Shop system would also affect a large number of non-EU businesses. The European Commission has noted that the UK had been by far the largest amount of OSS users from outside the EU (616, followed by Ireland at 166), representing 60 per cent of all users of the ‘non-Union scheme’ and 50 per cent of all VAT revenue collected via the MOSS from third country suppliers of electronic services.69 To continue using the system they will need to move their VAT registration to one of the remaining Member States, and we expect many of them have already done so in anticipation of the UK’s scheduled withdrawal from the EU in March.

7.12We have used the designation ‘British’ in relation to the impact of leaving the EU’s VAT system for B2C sales on domestic businesses carefully. This is because the position of Northern Irish companies, if the Withdrawal Agreement is ratified, is unclear. The controversial ‘backstop’ would require Northern Ireland to continue applying EU VAT law “concerning goods”. Whether that means they would continue to be eligible for using the OSS for distance sales of goods to EU Member States is unclear, since the One Stop Shop—in its proposed expanded form—is not used just to account for VAT on goods but services as well. This in turn also means we do not know if non-EU businesses—including UK ones—could access the non-Union scheme for the OSS by having a Northern Irish VAT registration. We are seeking clarification from the Minister on this point.70

7.13The draft rules for the VAT treatment of distance sales to consumers are accompanied by proposals for a new tool to identify VAT evasion on B2C sales by analysing EU-wide data on payment transactions. We have taken note of the Treasury’s concerns about the implications of the proposal on centralised risk analysis of payments data to identify VAT non-compliance in B2C sales. The Minister has expressed discomfort about the potential impact on “UK tax sovereignty” of this tool, especially if it could eventually lead to one Member State being able to direct the investigations of the tax authority of another EU country.71 While not wishing to underplay its concerns, we remain far more worried about the risk to the UK’s autonomy over its tax system created by the post-Brexit transitional period during which the UK would be required to implement new EU tax legislation over which the Government—uniquely among all the countries to which such laws would apply—would not have had a veto.

7.14The potential for the transitional period to be extended until the end of 2022 (if the Withdrawal Agreement is ratified) also creates the risk that HMRC might have to invest resources into a national system plugged into the central EU database for payment transactions for usage for a year or less. Under the Agreement, the UK would be under a legal obligation to implement the new legislation until 31 December 2022 but HMRC would automatically cease to have access to it on 1 January 2023 (unless a new UK-EU legal arrangement would keep such access in place). In such a scenario, the costs of implementing the new anti-VAT evasion system would in all likelihood outweigh any benefits to the UK taxpayer.

7.15If the Withdrawal Agreement is not ratified, the UK’s change from ‘Member State’ to ‘third country’ vis-à-vis the EU occurs automatically on 30 March 2019. That means the impacts described above—lack of UK access to the One Stop Shop and HMRC’s removal from the EU’s centralised tax and customs databases—would then happen overnight, without the benefit of the transitional period foreseen in the Withdrawal Agreement. There would also be no agreed mechanism to resolve any VAT-related issues for cross-border sales that took place before ‘exit day’, where the Agreement does explicitly cater for such situations.72

7.16More generally, as we have stated in numerous Reports since the referendum, in a ‘no deal’ scenario the VAT Directive will in principle require the remaining Member States to check the VAT liability of all goods moving between the UK and the EU.

7.17How the EU and its individual Member States will enforce this in a ‘no deal’ scenario is unclear. With respect to the border with Ireland, both the Irish Government and the European Commission have recently said they would seek to ensure collection of VAT on goods without the need for border controls73 (although they are likely to put further pressure on the UK to agree to the ‘backstop’, or an equivalent mechanism for continued alignment, to minimise the risk of tax evasion). However, serious disruption is still likely to occur at continental ports where VAT, customs and regulatory controls on UK goods will need to take place for the first time since 1992. The French, Belgian and Dutch Governments have all indicated they intend to enforce the legal requirements for VAT controls on ‘third country’ goods against UK imports, as set out in EU law, from ‘day one’.

7.18With respect to imports into the UK, the Government wants to reduce the impact of this by introducing “postponed accounting” for all business-to-business supplies entering the UK (at a potential significant risk to the Exchequer due to the VAT evasion).74 UK consumers are also likely to experience new barriers to shopping online in an EU country after the UK leaves the Single Market. For example, parcels brought in from the EU will face new VAT and customs checks. UK residents will also no longer benefit from recent EU legislation to counter ‘geoblocking’, where websites offer consumers from different EU Member States different prices for the same products.)75

7.19To avoid VAT-related friction in trade in a ‘no deal’ scenario, or at the end of any post-Brexit transitional, the Government set out in its July 2018 Chequers White Paper that it wants to remove the need for any VAT border controls on goods moving between the UK and the EU as part of the future economic partnership. (This would not only address one of the causes of delays at UK and EU ports, but also obviate the need for the VAT provisions of the ‘backstop’ that would keep Northern Ireland tied to substantial parts of EU tax law.) However, the Government has been unable or unwilling to give any indication of how this would work, except to say it would involve ‘common processes and procedures’ with the EU.76 We therefore remain concerned that the Chequers proposals imply continued UK adherence to substantial parts of EU VAT law indefinitely, but without Treasury influence over the future direction of those laws (which would be decided by the remaining Member States).

7.20Given the lack of clarity about the future impact of EU VAT legislation on UK tax law, we have decided to retain all four VAT e-commerce proposals under scrutiny in anticipation of further information from the Treasury in due course about the legislative deliberations and their potential impact on the UK tax system post-Brexit. We also ask that the Minister’s next update on these proposals clarifies whether Northern Ireland would retain full access to the One Stop Shop under the ‘backstop’.

7.21In light of the substance of the Commission proposals, have also drawn these developments to the attention of the Business, Energy and Industrial Strategy, Digital, Culture, Media and Sport, and Treasury Committees. Because of the potential different VAT status of Northern Ireland under the backstop, we also consider the Northern Ireland Affairs Committee may have an interest.

Full details of the documents

(a) Proposal for a Council Directive amending Council Directive 2006/112/EC as regards provisions relating to distance sales of goods and certain domestic supplies of goods: (40259), 15471/18, COM(18) 819; (b) Proposal for a Council Implementing Regulation amending Implementing Regulation (EU) No 282/2011 as regards supplies of goods or services facilitated by electronic interfaces and the special schemes for taxable persons supplying services to non-taxable persons, making distance sales of goods and certain domestic supplies of goods: (40260), 15472/18, COM(18) 821; (c) Proposal for a Council Directive amending Directive 2006/112/EC as regards introducing certain requirements for payment service providers: (40264), 15508/18 + ADDs 1–2, COM(18) 812; (d) Proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards measures to strengthen administrative cooperation in order to combat VAT fraud: (40263), 15509/18, COM(18) 813.

Background

7.22The EU has adopted a complex system of Value Added Tax (VAT) legislation, which has as one of its primary objectives the complete abolition of VAT-related border controls on goods moving between Member States while retaining physical risk-based checks for goods entering the European Union from so-called ‘third countries’.77

7.23Under EU law, VAT is a consumption tax and as such is payable in the country where a good or service provided to or used by the final consumer.78 In practice, this means that the sale of a good from one Member State to another—for example from France to Luxembourg—incurs a VAT charge at the rate applicable in the latter, and under its domestic legislation. For business-to-consumer sales between countries, the onus to account for the VAT in the country of consumption falls on the seller based since individual consumers are not registered for VAT purposes.79

7.24For businesses, especially smaller ones, the need to account for VAT on goods sold to consumers in another country—nowadays principally via the internet—on the basis of that latter country’s tax legislation is a significant administrative burden. It acts as a barrier to selling goods to overseas consumers, because it is often difficult or expensive to comply with unfamiliar VAT legislation in another language. To address this problem on an EU-wide basis, and make it easier for EU businesses to sell their goods online to consumers in another Member State as part of the Single Market, an intra-EU distance selling threshold is in force. This allows a business selling goods to a consumer in another Member State to pay VAT domestically at their national rate, as long as their sales do not exceed a certain threshold in value per year to a specific Member State of consumption.80 This distance selling threshold does not apply to B2C goods supplied by non-EU companies, who must make sure the VAT on their sales is accounted for in the country of consumption.81

7.25For business-to-consumer sales of services like accounting between EU Member States, VAT is typically payable in the country of the supplier so the additional administrative burden related to the tax does not arise.82 However, this is not the case for electronically-supplied services, like website hosting or providing cloud data storage: since 2015, EU law requires VAT on the provision of such services to be paid in the country of the consumer.83 To avoid suppliers of such services having to register for VAT in every EU Member State where they have customers, a mechanism known as the Mini One Stop Shop (MOSS) was established.84 This allows them to pay the VAT for the electronically-supplied service, at the rate applicable in the country of the consumer, via their national tax authority (i.e. without having to register for VAT in another Member State).85 The revenue is then remitted to the Government of the Member State where the consumer is based.

7.26The various possibilities for where VAT is accounted for, and ultimately paid, for B2C sales to EU-based consumers under current European legislation is shown in table 1 below.

Table 1: VAT treatment of B2C sales in the EU under current legislation

Type of sale

VAT accounted for in:

VAT ultimately paid to:

Sales between EU Member States

B2C sale of a good

For sales to a specific Member State where overall sales to that country have a cumulative annual value below the distance selling threshold (between €35,000 and €100,000)

Member State of the supplier

For sales to a Member State once the national distance selling threshold has been exceeded

Member State of consumption

B2C sale of a service, except electronically-supplied services

Member State of the supplier

B2C sale of electronically-supplied services

Member State of the supplier, via the MOSS

Member State of consumption

Sales from a non-EU country into the EU

B2C sale of a good or service, except electronically supplied services

Member State of consumption

B2C sale of electronically supplied services

Where the non-EU supplier is registered for the MOSS

Member State of MOSS registration

Member State of consumption

Where the non-EU supplier has no MOSS registration

Member State of consumption

7.27The various complexities within this system as shown above led the European Commission to propose a legislative rationalisation of the way in which VAT must be paid on B2C sales within the EU in December 2016.86 The primary purpose of its proposals was to reduce the extent to which differences in VAT law were hindering the EU’s internal market for e-commerce, for both the supply of electronic services and the online sale of goods to consumers.

7.28In December 2017, EU Finance Ministers unanimously adopted the Commission proposals with a number of significant amendments.87 The first reforms contained in the legislation took effect on 1 January 2019, in particular by allowing small businesses selling electronically-supplied services to account for VAT on intra-EU sales in their home Member State as if it were a domestic transaction (for annual sales up to €10,000). The aim of this change was to reduce the administrative burden on small companies of having to pay VAT in the Member State of the customer in cases of cross-border sales (a key demand of UK businesses in this sector).88 Other changes which took effect at the start of this year related to invoicing and record-keeping requirements.

7.29However, the most substantial elements of the new VAT legislation for e-commerce, which are set out in more detail in our Report of 22 November 2017, are not due to take effect until January 2021. The most important changes are:

7.30A basic overview of the situation after these changes to the VAT treatment of distance sales to EU-based consumers take effect is shown in table 2 below (compared to the situation described in table 1 above). It presumes businesses will register for the One Stop Shop where they are able to do so, to simplify how they account for VAT on cross-border sales.

7.31As can be seen, the rules will become simpler for EU business selling within the EU (which, as a rule, will be able to account for all VAT on cross-border sales in their own country via the OSS). However, non-EU suppliers will continue to face a higher administrative burden because their use of the One Stop Shop will be limited to accounting for VAT on electronically-supplied services and goods valued at €150 or less. As set out in paragraphs 56 to 64 below, this will be the default situation for UK businesses that sell to EU-based consumers once European VAT law ceases to apply in the UK.

Table 2: VAT treatment of B2C sales in the EU from January 2021

Type of sale

VAT accounted for in:

VAT ultimately paid to:

Sales between EU Member States

B2C sale of a good

If sales to all other Member States cumulatively have not exceeded the €10,000 distance selling threshold

Member State of the supplier

If sales to other Member States have exceeded the €10,000 distance selling threshold

Member State of the supplier, via the OSS93

Member State of consumption

B2C sale of a service other than electronically-supplied services

Member State of the supplier

B2C sale of electronically-supplied services

Member State of the supplier, via the OSS

Member State of consumption

Sales from a non-EU country into the EU

B2C sale of a good valued at €150 or electronically-supplied service

Member State of OSS registration, via the OSS

Member State of consumption

B2C sale of a good valued at more than €150 or non-electronically supplied services

Member State of consumption

7.32The Government had expressed concern about some elements of the proposals earlier on in the legislative process, in particular the near-elimination of the intra-EU distance selling threshold for goods (which means EU businesses will have to account for VAT to the tax authorities of another Member State sooner than is currently the case).94 However, in October 2017 the Financial Secretary to the Treasury (Rt Hon Mel Stride MP) informed the Committee that the Government was supportive of the proposals as amended by the Member States, given that the VAT accounting mechanism via the One Stop Shop would be extended to reduce the impact this would have on businesses. The Minister confirmed this by letter of 10 January 2018, in which he added that the legislation as adopted “achieved an acceptable balance for the UK”. Accordingly, the Chancellor voted to support their adoption at the ECOFIN Council on 5 December 2017.

7.33When the e-commerce VAT package was adopted in December 2017, the Commission and the Member States both acknowledged that this second tranche of reforms requires further detailed rules, for example in relation to the operation of the One Stop Shop for all distance sales and the application of EU VAT rules to online marketplaces, to allow tax authorities and businesses to operate effectively in the new legal environment.95 Proposals for these detailed implementing rules were published by the European Commission in December 2018, and deposited for scrutiny by the Treasury in January this year.

7.34We have made an assessment of the proposals below, as well as setting out in paragraphs 56 to 64 to what extent the EU’s new rules on VAT for online shopping are likely to remain relevant for the UK despite its withdrawal from the European Union in just under two months’ time.

The Commission’s proposals

7.35As noted, the European Commission published detailed proposals for the implementing rules for the EU’s new VAT system for online shopping in December 2018. Its package of measures consists of four separate pieces of draft legislation, namely:

7.36We have assessed the substance of these four proposals further below, in relation to documents A and B (which relate to the detailed implementing rules for the new VAT system for online shopping within the EU) and documents C and D (which are supplementary proposals related to anti-fraud measures). All four documents are based on Article 113 of the Treaty on the functioning of the European Union, which means they must be agreed unanimously by all Member States and the European Parliament has a consultative role only.100

Detailed VAT rules for online shopping within the EU

7.37The purpose of the first two proposals101 is to amend the VAT Directive102 and its Implementing Regulation103 to provide the detailed rules for the extension of the One Stop Shop VAT accounting mechanism to new categories of distance sales, and the new VAT obligations of online marketplaces and sales platforms for goods sold to EU consumers by businesses located outside the Union. We discuss each of these elements in turn below.

Extension of the One Stop Shop to distance sales of goods and non-electronic services

7.38As noted the ‘Mini’ One Stop Shop as it exists at present applies only to the cross-border supplies of electronic services by a business to a consumer based in two different EU Member States. It allows the business to account for the VAT on such sales to their national tax authority, but applying the rate of the Member State of the consumer and the revenue is then remitted to the latter. The overall effect is that the business does not have to register for VAT in each Member State where it sells its services.104

7.39From January 2021, the One Stop Shop VAT accounting mechanism is due to be extended to two scenarios for cross-border sales involving a customer in the EU:

7.40To facilitate the expansion of the One Stop Shop, the detailed implementing rules put forward by the Commission in month would introduce changes to the One Stop Shop in relation to the allocation of identification numbers;105 corrections to declarations;106 a decision by a business to cease using the OSS;107 and the records to be kept when registered for the scheme.108 According to an Explanatory Memorandum on the proposals submitted by the Financial Secretary to the Treasury (Mel Stride) on 10 January 2019, these are “broadly extensions of the Mini One Stop Shop (MOSS) existing rules, rather than substantive changes”.

7.41Finally, the Commission has proposed an amendment relating to the declaration and payment of import VAT where the One Stop Shop is not used to declare VAT on goods imported by consumers through an online sale from a non-EU country (including the UK after Brexit). The Minister’s Explanatory Memorandum notes that this would require payment of any deferred import VAT to be made by the middle of the month following the import, rather than the end of that month (to align the deadlines with those relating payment of customs duties under the Union Customs Code).109

VAT obligations of online marketplaces

7.42The December 2017 VAT e-commerce Directive inserted a new Article 14a into the 2006 VAT Directive, providing that—where a business facilitates, through the use of an “electronic interface” such as an online marketplace, platform or portal—a distance sale of goods valued at €150 or less imported from outside the EU the business “who facilitates the supply shall be deemed to have received and supplied the goods himself”. In plain terms, this means that the online platform becomes responsible for accounting for the VAT on the sale to the consumer, rather than the supplier which actually imports the good from outside the EU for sale via that platform. This new legal responsibility for online marketplaces was introduced by the Member States to make sure they play their part in the “effective and efficient collection of VAT”.110

7.43In its implementing proposals of December 2018, the Commission is recommending the Member States make a number of technical changes to “clarify the VAT rules” where an online sales platform is involved.

7.44Firstly, the Commission wants to introduce common definitions of when an electronic interface is legally ‘deemed’ to facilitate a supply, and therefore is caught by the new provisions to make them liable for VAT. This would be the case for example where the platform sets the terms under which the supply is made, or is involved in the ordering or delivery of the goods.111 As regards the amount of VAT an online marketplace would have to collect from the final consumer, a specific “good faith” clause would prevent them from being held liable for any additional VAT tax authorities believe has been missed (where the platform can demonstrate that they collected the amount of VAT they reasonably believed was due, based on information about the sale as provided by the supplier outside the EU).

7.45Secondly, for legal and accounting purposes, the proposal would split the sales ‘facilitated’ by an electronic interface into two: a supply from the original non-EU supplier to the platform, and a second supply from the platform to the consumer. To mitigate against the risk of VAT revenue losses resulting from the supply to the platform112 and the creation of additional administrative burdens for businesses, the Commission’s draft rules would ‘zero rate’ the supply to the online platform (meaning it would not have to pay VAT to the original supplier).113

7.46Like other non-EU businesses, online platforms established outside the EU but facilitating sales of goods to European consumers would also be allowed to use the expanded One Stop Shop (OSS) scheme for payment of VAT on supplies under €150 they facilitate via their platform, provided they are registered for VAT purposes in an EU Member State (see paragraphs 39 to 42 above).114

7.47The Treasury’s Explanatory Memorandum in January 2019 sets out the Government’s initial position on the substance of the Commission’s proposals. In it, the Financial Secretary welcomed the proposals, reiterating that they are needed to “support higher level legislation” (the VAT E-Commerce Directive) “which has already been agreed”. He adds:

“Given that the changes represent a major development in the taxation of intra-EU and cross border business, our objective will be to ensure that the rules meet the balance between being workable for business and Tax Administrations without too great a burden, and ensuring that revenue is safeguarded. The keys to achieving this objective will be the definition of who is deemed liable as the supplier and therefore liable to account for VAT; the extent of the “good faith” clause; the viability of the rules on when payment is taken to have been made, and how far the proposed necessary information is readily available.”

New anti-VAT fraud measures

7.48In parallel to the detailed implementing rules for the new application of EU VAT law to online shopping and the VAT responsibilities of online platforms, the European Commission also tabled two proposals to strengthen the ability of national tax authorities in the EU to address VAT evasion and non-compliance. According to the Explanatory Memorandum submitted by the Financial Secretary, such fraud is considered a “significant problem” in the e-commerce sector across the EU, with total VAT losses on cross border supplies of goods between Member States alone estimated—by the Commission—at €5 billion (£4.4 billion) a year.

7.49Concretely, the two legislative proposals would amend the VAT Directive and the related Regulation on administrative cooperation115 (which provides the legal basis for exchange of information between the EU’s national tax authorities on VAT-related issues). They would establish a system requiring payment service providers like banks to retain data on transactions between consumers and businesses in different Member States, or where the business is located outside the EU.116 This information would be collected in a centralised EU-wide EU database117 to “enable national tax authorities to be able to identify and tackle online VAT fraud and non-compliance more easily”.118 According to the Commission, the data would enable tax authorities to identify suppliers of business-to-consumer goods and services; verify the number of transactions they are involved in, and their monetary value; and verify the origin of the payments.

7.50Access to the information in this new database will only be granted to designated national liaison officials in ‘Eurofisc’ (the EU’s network of national tax officials who work to tackle VAT fraud), and requires any information from the database to be verified with other information held by the tax authorities before it can be used further in ensuring compliance or undertaking a fraud investigation. The aim is for the new database to be operational by 1 January 2022, a year after the new rules for VAT on online shopping described in paragraphs 39 to 48 are due to take effect. It is expected it would cost the EU approximately €12 million to set up the new system, with annual running costs of €4.5 million.119 Member States themselves would be responsible for all the costs of developing national electronic systems to collect and supply the relevant information on payment transactions to the central database.120

7.51The Financial Secretary’s Explanatory Memorandum on the new anti-VAT fraud proposals reiterates that the Government “supports changes which will facilitate the effective exchange of information and administrative co-operation to better control and counter VAT fraud”. It adds that the new database—should the UK have access to it after Brexit—could “potentially be of help to HMRC” insofar as it as it might enable tax officials to determine the VAT due from online sellers, “which can be difficult to ascertain when the seller is based outside a [EU] Member State”.

7.52However, the Treasury believes there “a number of uncertainties with regard to how the proposal would operate in practice and its efficacy, which will need exploring in further EU level discussions”. These include notably the amounts of data to be collected (for example, whether it could be distilled into useful intelligence) and the way of linking sellers to buyers to give officials confidence that a specific payment recorded relates to a sale on which VAT was due. In addition, the Minister notes that the Commission proposal is silent on how the system can capture data where the payment service provider is based outside of the EU, which might incentivise sellers to use non-EU payment systems and drive up VAT non-compliance. (Similarly, it is unclear how national tax authorities would be able to enforce VAT compliance from sellers operating in third countries outside of the EU.)

7.53The Government is also wary about the potential implications for “UK tax sovereignty and whether the risk analysis will take account of UK priorities” (and, especially, whether it could eventually result in other Member States being able to direct HM Revenue & Customs to undertake specific investigations). This echoes similar concerns expressed by the Treasury on a related Commission proposal to identify VAT evasion, in relation to business-to-business supplies, as we noted in our Report of 28 March 2018.

Implications of the EU’s VAT proposals for the UK

7.54There are far-reaching consequences for the UK in the context of its withdrawal from the EU with regards to the administration of Value Added Tax, especially in cross-border trade with the EU. In the context of VAT on e-commerce sales by UK suppliers to EU-based consumers specifically, the consequences of becoming a ‘third country’—whether in March 2019 or at the end of any post-Brexit transitional period, are also significant. Once the UK is outside the common VAT area:

7.55As we have noted in several of our Reports since the referendum, the UK’s exit from the common VAT area also has significant implications for the flow of trade—especially in goods—between the UK and the EU more generally.

7.56When EU VAT law ceases to apply here, the UK will be considered a “third country” for the purposes of EU tax legislation. As such, VAT will become an import tax for goods exported from the UK to the EU and vice versa. Under the 2006 VAT Directive the customs authorities of the EU Member States must, in principle, ensure payment of the tax at the border before the goods can be released for free circulation in the EU.123 Not carrying out documentary—and possibly physical controls—on imports of goods124 to ascertain their VAT liability would create a significant risk of large-scale tax evasion, as VAT could remain unpaid and lead to missing trader fraud.125

7.57Within the EU, VAT-related controls on goods moving between Member States were abolished with the advent of the Single Market in 1992. This led to the removal of physical customs posts on intra-EU frontiers, including at the Irish border and at UK ports connecting it to the continent. To ensure collection of VAT on goods entering from another Member State in the absence of border controls, all EU countries submit data on intra-EU purchases and supplies by their businesses into the VAT Information Exchange System or VIES (allowing tax authorities to match incoming and out-going goods, and check the VAT liability.) VIES is based on the EU’s legal framework for VAT and closely connected to the operation of the whole common system of Value Added Tax. As a result, no non-EU country has access to the database.

7.58The UK will cease to be part of this intricate intra-EU system when it leaves the European Union. At that point, the EU’s legal requirement for VAT controls on trade with the ‘third countries’ like the UK would, in the absence of new solutions, inevitably add friction to trade at ports like Dover and Calais where none currently exists. To address this abrupt change in the tax treatment of goods moving between the UK and the EU after Brexit, and in particular the need for re-imposed border controls in absence of other solutions, the draft Withdrawal Agreement, if ratified, would cover VAT-related issues in three ways:

7.59The Government’s ambition, as set out in the July 2018 Chequers White Paper, is to overcome the need for any VAT-related border controls on goods moving between the UK and the EU as part of the future economic partnership. This would not only address one of the causes of delays at UK and EU ports, but also at a stroke obviate the need for the VAT provisions of the ‘backstop’ that would keep Northern Ireland tied to substantial parts of EU VAT law. However, the devil is in the practical detail. The Government has repeatedly refused to give any indication of how it intends to persuade the EU to agree to the removal of VAT controls at the border without the UK following European tax legislation on goods. We consider it important in this regard that:

7.60The negotiation of an arrangement which removes the need for VAT controls on goods in trade with the EU is unprecedented and will not therefore most likely not be straightforward. It will be even more challenging for the Treasury to secure such an arrangement, without binding the UK to continued adherence substantial parts of EU tax legislation as it evolves in the future, without the input and veto rights that the remaining EU Member States would have over changes to that system.

7.61If the Withdrawal Agreement is not ratified, the mitigations referred to in paragraph 59 above would not take effect, and the UK would abruptly leave the common VAT area on 29 March 2019. The impact of this on cross-border trade at UK and EU ports, combined with the re-imposition of other customs and regulatory controls, is likely to be extremely disruptive. How VAT-related controls would be carried out on either side of the Irish border is unclear (and both the Irish Government and the European Commission have recently indicated that, at the land border, checks could be avoided even in a ‘no deal’ scenario).127 While the Government’s objective to secure frictionless trade with the EU would still hold, it is impossible to judge at this stage how and when negotiations might start on a new UK-EU VAT arrangement.

7.62Given the significance of the draft EU rules for VAT on online shopping, both while the UK continues to apply European tax law and in the context of any future negotiations for a new UK-EU VAT arrangement, we have retained the proposals under scrutiny for the time being.

Previous Committee Reports

None. These are new proposals for legislation. However, the Committee previously considered the initial reforms of the EU’s VAT rules for online shopping on several occasions.

See (38341), 14820/16 + ADDs 1–2, COM(16) 757: Twenty-sixth Report HC 71–xxiv (2016–17), chapter 7 (18 January 2017); Fortieth Report HC 71–xxxvii (2016–17), chapter 17 (25 April 2017); Second Report HC 301–ii (2017–19), chapter 19 (22 November 2017); and Eleventh Report HC 301–xi (2017–19), chapter 12 (24 January 2018).

57 Directive 2006/112/EC, as amended.

58 Some of the changes agreed in December 2017 took effect in January 2021. This included principally new legislation allowing small suppliers of electronic services—like mobile phone apps—to account for VAT on intra-EU sales in their home country as if it were a domestic transaction (for annual sales up to €10,000).

59 Similarly, the One Stop Shop will be extended so that it can be used by third country (non-EU) firms for imports of goods worth €150 (£135) or less to EU-based consumers, provided the company has registered for VAT purposes in an EU Member State (the so-called ‘non-Union scheme’.

60 See Article 45 of the VAT Directive for the treatment of business-to-consumer sales of services. An exception to this rule for telecommunications, broadcasting and electronically-supplied services, like web hosting, is set out in Article 58.

61 See Article 14a of Directive 2006/112/EC. The threshold of €150 was chosen because this is the value of a good at which a full customs declaration is necessary when it enters the Customs Union. Shopping platforms would also have to account for VAT on sales of goods of any value from third country businesses to final consumers in the EU where the goods are already located within the Union at the point of purchase (i.e. where they are fulfilling a warehousing arrangement, and the goods do not physically need to be imported from outside the EU at that stage).

62 This means that the online platform becomes responsible for accounting for the VAT on the sale to the consumer, rather than the supplier which actually imports the good from outside the EU for sale via that platform. This new legal responsibility for online marketplaces was introduced by the Member States to make sure they play their part in the “effective and efficient collection of VAT.

63 In particular, an Explanatory Memorandum submitted by HM Treasury on 10 January 2019 notes a number of areas of particular concern, including the extent of the “good faith” clause for online platforms when accounting for VAT on goods imported from outside the EU; and the viability of the rules on when payment is taken to have been made, and how far the proposed necessary information is readily available.

64 The transitional period would initially last until 31 December 2020, but could be extended until 31 December 2022 by mutual agreement between the UK and the EU.

65 Statement by the Council of 5 December 2017.

66 European Scrutiny Committee Report of 5 September 2018.

67 See for more information our Report of 28 March 2018 on Brexit and VAT.

68 Under Article 113 TFEU, EU legislation on indirect taxes like VAT and excise must be adopted by unanimity in the Council. This means every Member State has a right of veto. The European Commission has recently proposed to introduce Qualified Majority voting for EU tax legislation, but that would itself require the unanimous agreement of all Member States and their national parliaments under [Article 47 TEU].

69 Commission Impact Assessment SWD(2016) 379, p. 77.

70 We have raised a similar issue with the Financial Secretary in relation to EU proposals to limit the VAT registration threshold for small businesses at €85,000. It is unclear whether that limit would have force of law in Northern Ireland under the backstop.

71 The Treasury expressed similar concerns with respect to a separate proposal on the EU’s TNA tool, which aims to identify VAT fraud in cross-border business-to-business transactions. We cleared that proposal from scrutiny on 23 May 2018.

72 Title III of Part Three of the Withdrawal Agreement deals specifically with ‘on-going Value Added Tax and excise duty matters’.

73 For example, EU Chief Brexit Negotiator Michel Barnier said on 23 January 2019: “We will have to find out an operational way to carrying out checks and controls without putting back in place a border [in Ireland].”

74 HM Revenue & Customs, “VAT for businesses if there’s no Brexit deal“ (accessed 24 January 2019).

75 For more information on the EU’s new geoblocking legislation, please refer to our Report of 5 September 2018.

76 In this respect, we recall that EU’s existing legislation on VAT on trade in goods between Member States was designed specifically to remove the need for border controls; the VAT provisions of the Irish backstop aim to remove the need for VAT-related border controls between the two parts of the island of Ireland by keeping Northern Ireland tied to EU tax law on goods; and no non-EU country with its own VAT system has negotiated the removal of VAT-related border controls with the EU.

77 Individual countries can adopt deferment procedures to allow the VAT to be collected after the goods clear the border, to reduce the administrative burden on traders importing goods. However, this can require up-front financial guarantees to protect the receiving country against the risk of VAT evasion.

78 Directive 2006/112/EC, as amended.

79 For business-to-business sales where the seller and the buyer are in different EU Member States, the buyer has to account for the VAT on their normal VAT return to their national tax authority. See for more information our Report of 5 September 2018 on the EU’s VAT system for business-to-business sales.

80 See article 34 of Directive 2006/112/EC. This exemption does not apply to goods imported by consumers from non-EU countries. The distance selling threshold can be set by individual Member States between €35,000 (£30,500) and €100,000 (£87,000), with the UK having chosen £70,000.

81 In practice this requirement is often circumvented, for example by (falsely or truthfully) telling customs authorities that a parcel is worth less than €22. This is the EU’s so-called Low Value Consignment Relief (LVCR) threshold, below which goods imported from outside the EU do not accrue a VAT charge. LVCR is being abolished as of 1 January 2021.

82 See the European Commission’s website, “Where to tax?“ (accessed 23 January 2019).

83 See Council Directive 2008/8/EC.

84 The MOSS has a ‘non-Union scheme‘, which allows a non-EU company to register for VAT in one Member State to use the One Stop Shop throughout the EU. The UK had seen by far the largest amount of users from outside the EU (616, followed by Ireland at 166), representing 60 per cent of all users of the ‘non-Union scheme’ and 50 per cent of all VAT revenue collected via the MOSS from third country suppliers of electronic services. After Brexit, UK VAT registrations will no longer be eligible for use in the MOSS (Commission Impact Assessment SWD(2016) 379, p. 77.)

85 The European Commission has also recently proposed legislative changes that would allow small businesses from one EU country to benefit from the VAT exemption threshold in another Member State under certain conditions.

86 See our Report of 22 November 2017 for more information on the rationale behind the latest reforms of VAT on B2C sales within the EU.

87 The resulting legislation on VAT for e-commerce is contained in Council Regulation (EU) 2017/2454, Council Directive (EU) 2017/2455 and Council Implementing Regulation (EU) 2017/2459.

88 While businesses would be able to use the MOSS to reduce the burden of having to pay VAT in the Member State of the customer for cross-border sales of electronic services, the Commission noted in its impact assessment that “while the MOSS itself is a significant simplification for business who make cross-border supplies of electronic services”, with the cost of roughly €2.200 per business annually being “far less” than the estimated average cost of € 41,000 for direct registration for VAT purposes in another Member State), it is still “disproportionately high” for the smallest businesses. See also Commission Impact Assessment SWD(2016) 379, p. 17.

89 See for more information on each EU country’s distance selling threshold the Commission document “VAT thresholds“. The thresholds apply to incoming cross-border sales by businesses based in other Member States (e.g. if France has a threshold of €35,000,a UK business—until Brexit—can make supplies to French customers up to that value and pay VAT in the UK. For any sales above that threshold, the business would have to register for and pay VAT in France).

90 At present, the MOSS can only be used for cross-border sales of electronic services by a business to a consumer based in different EU Member States.

91 The threshold of €150 was chosen because this is the value of a good at which a full customs declaration is necessary when it enters the Customs Union.

92 See Article 14a of Directive 2006/112/EC.

93 Businesses do not have to make use of the One Stop Shop. If they do not, they would need to register for VAT in every other EU Member State where they make a sale once they exceed the new €10,000 distance selling threshold.

94 For example, with respect to the changes to distance sales of goods within the EU, the Financial Secretary and his predecessor noted that this proposal could “increase burdens disproportionately for the smallest businesses given the relatively high distance selling thresholds applicable at present”. In April 2017, the previous Minister noted that “the case still needs to be made” for the positive impact of reducing the threshold for distance sales of goods, because “there are benefits to the current arrangements, (…) difficulties in moving from the current thresholds, and (…) the differences between goods and services justifies different thresholds”. See for the example the Letter from Jane Ellison to Sir William Cash (18 April 2017); the letter from Mel Stride to Lord Boswell (3 July 2017); and the letter from Mel Stride to Lord Boswell (21 July 2017).

95 See for more information the statement by the Council entered into the minutes of the Council meeting of 5 December 2017.

96 Commission document COM(2018) 819.

97 Commission document COM(2018) 821.

98 Commission document COM(2018) 812.

99 Commission document COM(2018) 813.

100 The Commission is expected to make recommendations later in 2019 for the introduction of some Qualified Majority voting in matters of taxation, but any such changes would need to be approved by all Member States before they could take effect.

101 Commission document COM(2018) 819 and Commission document COM(2018) 821.

102 Council Directive 2006/112/EC.

103 Council Implementing Regulation 282/2011.

104 From 1 January 2019, providers of electronic services to consumers in another EU country can choose to pay VAT domestically at their national rate for the first €10,000 worth of sales.

105 Article 369q of the VAT Directive as amended by the VAT E-Commerce Directive provides that the Member State of identification (i.e. where the business using the One Stop Shop is registered for VAT purposes) has to allocate an identification number to an intermediary acting in the name and on behalf of a business using the OSS for distance sales of goods imported from third territories or third countries. The latest Commission proposal would add a second paragraph to Article 57e of the VAT Implementing Regulation, clarifying that this identification number is an authorisation enabling him to act as intermediary and cannot be used by the intermediary to declare VAT on taxable transactions.

106 For example, the VAT E-commerce Directive allows making corrections to previous One Stop Shop VAT returns, within three years, in a subsequent return (instead of having to resubmit the return of the tax period to which the corrections relate, as is the case in the mini One Stop Shop for supplies of electronic services). The VAT e-commerce Directive does however not specify how corrections to returns relating to tax periods preceding 1 January 2021—i.e. before the new system takes effect—have to be made as of 2021. To limit the impact for businesses of the changeover from one IT system to another, the Commission proposes to keep in place the current system for making corrections to mini One Stop Shop VAT returns relating to the periods from the fourth quarter of 2017 to the fourth quarter of 2020.

107 Article 57g of the VAT Implementing Regulation provides that where a business voluntarily ceases using the mini One Stop Shop, regardless of whether he continues to supply goods or services which can be eligible for its use, they shall be excluded from the OSS in any Member State for two calendar quarters. This provision is removed “as it is not considered useful by Member States and may create additional burdens for the taxable persons concerned”.

108 In particular, under current EU VAT law, the records to be kept by a business using the mini One Stop Shop currently include the name of the customer, where known to the taxable person. As this information is not needed to determine the Member State in which the supply is taxable, and may raise data protection issues, it is no longer included in the records to be kept by taxable persons using the One Stop Shop listed in Article 63c of the VAT Implementing Regulation.

109 The Minister’s Explanatory Memorandum notes that this “accelerates payments from the end of the month in cases where the import VAT is paid on receipt by the customer and is collected and accounted for on a monthly basis by the importing agent, for example a Fast Parcel Operator”.

110 Letter from Mel Stride to the European Scrutiny Committee (24 October 2017).

111 The platform would not have to account for VAT on any sales made via its system where it only provides a payment processing service or the listing of good.

112 If the platform pays has to pay VAT to the non-EU supplier, it can recoup this from their national tax authority in the EU since VAT is ultimately paid only by the final consumer. If the platform—deliberately or otherwise—then does not account for VAT on the sale to that consumer, revenue could be lost since the refund for the VAT paid by the platform to the original supplier may already have been paid out.

113 To reduce the burden on platforms of checking whether the recipient of the supply is a consumer rather than a business (in which case the importing business, rather than the platform, would be liable for the VAT on an import from a non-EU country), the draft law would create a legal presumption that all transactions caught by the new rules are a business-to-consumer sale via a platform and involving a non-EU supplier, but this could “be rebutted where information is provided to the contrary”.

114 Online platforms would also be allowed to use the OSS for domestic supplies (i.e. to a consumer based in the same Member State as the platform), because they may hold stock in different Member States and would therefore have to register for VAT in each EU country.

115 Regulation 904/2010, as amended.

116 Data need only be shared with the tax authorities when the number of relevant transactions to any supplier exceeds 25 payments per quarter, meaning that small volume cross border trade is excluded from the scope of the proposal.

117 This database is to be called the Central Electronic System of Payment Information (CESOP).

118 The Commission proposal uses already agreed definitions from the Payment Services Directive (Directive 2015/2366) and identifies the data that should be captured; as well as the circumstances in which the rules will apply and any assumptions that can be made about the status of the supplier and customer.

119 Until 2020, these costs will be borne by the EU budget via the 2014–2020 Fiscalis Programme, with further EU support likely to be available from the post-2020 Fiscalis Programme currently being established.

120 There are no estimates available for HRMC’s costs if it had to form part of the system, although the Commission estimates that tax authorities will face one off costs of €7.5 million and annual costs of €3.9 million.

121 As noted, the intra-EU distance selling threshold is in any event being reduced to €10,000 for all sales to other Member States cumulatively from January 2021, from the existing system of thresholds applicable on an individual Member State basis.

122 See for more information Table 2 above, which shows the difference in the functionalities of the expanded One Stop Shop for EU businesses and non-EU businesses respectively.

123 Although individual EU countries can defer payment, this is subject to certain administrative requirements and financial guarantees to minimise the risk of tax evasion.

124 VAT controls are also carried out by customs authorities on goods being exported: VAT is payable in the country of consumption, entitling businesses to a refund of VAT paid on their supplies when they export a good to another country. In absence of border controls, businesses could claim VAT refunds on goods that had not actually been exported.

125 Missing trader VAT fraud takes place when a company buys goods from another country without paying the VAT due on import. When selling the goods domestically, the company receives the entire amount of VAT, which it pockets rather than transferring it to the national Treasury. Carousel fraud takes this a step further: the same goods are bought and resold by the fraudster several times via middlemen, and each time the amount of collected VAT increases and the company either disappears or becomes insolvent before the tax authority can collect the accumulated VAT.

126 While Monaco is in the common VAT area, this is due to a treaty with France requiring it to observe French—and therefore EU-VAT legislation. VAT-related border controls exist on trade between the EU and the European Economic Area and Switzerland.

127 For example, EU Chief Brexit Negotiator Michel Barnier said on 23 January 2019: “We will have to find out an operational way to carrying out checks and controls without putting back in place a border [in Ireland].”



Published: 5 February 2019