Internet sales as a percentage of total retail sales in the UK, (as recorded by the Office for National Statistics), has grown steadily from under 5% in 2006, to around 20% in 2020 (prior to the Covid Pandemic), peaking during this period to approaching 40%, before a fluctuation at the start of 2021 (combined Brexit and Covid effect), then settling down to around 25% in 2023. The trend remains upwards, so internet sales are becoming increasingly important.
UK Businesses Importing Goods
For UK-based businesses, wishing to import goods from the EU post-Brexit, the rules have become aligned with the rest of the world, with new options available to facilitate imports such as:
- Postponed VAT Accounting (PVA)
- Deferment Accounts
- Customs Declaration Service (CDS) – replacing the former CHIEF system
- The creation of Freeports around the UK
Once imported, (VAT and Duty paid) goods can then be distributed into free circulation to customers in the normal way. VAT is charged to UK customers as applicable, and the import VAT is reclaimed as input VAT.
UK Businesses Exporting Goods
As part of Brexit planning, exporting for businesses has been made relatively straightforward (with no UK VAT or Duty due on exports from the UK perspective).
However, now the UK is outside of the EU and with the EU becoming like the rest of the world the important consideration will be the import rules in the country of receipt.
New EU VAT rules
In July 2021, the EU changed the VAT rules for cross-border VAT e-commerce – everyone in the e-commerce chain is affected both inside and outside the EU, postal operators and couriers, customs and tax administrations, through to consumers.
To facilitate trade the EU introduced the One Stop Shop and the Import One Stop Shop for consignments valued at 150 EUR or less.
Selling from a third country into the UK
Brexit rules which came into effect on 1 January 2021, had an impact on sellers based outside the UK, (EU and the wider world), selling small consignments with a value of £135 or less to customers into the UK, by requiring them to register for VAT in the UK, unless they sold small consignments into the UK using an online marketplace.
Importantly, no import duty is payable on consignments of £135 or less.
There is some anecdotal evidence that some EU businesses have ceased to sell goods online into the UK post Brexit, which does give the opportunity to UK-based businesses to import goods in bulk for distribution and sale within the UK.
Planning an e-commerce strategy
Now that the UK is no longer part of the EU it is important to seek appropriate advice in setting up an e-commerce strategy for importing goods into the UK and selling outside of the UK.
First Steps for UK Businesses Importing and Exporting
Anyone involved in the importing and exporting of goods, whether they are self-employed, (selling goods on a social media platform), a business (large or small) or an agent acting on behalf of a business, will need to understand what is required to import goods into the UK or export goods from the UK – the specific rules may be different according to the circumstances, but the same steps will each need to be considered.
Basic Requirements – consider what is required to import or export the specific goods to the county of destination:
- Ensure that each good that is being imported or exported is allocated a commodity code. The code describes the product and governs the duty and VAT payable at the port. This ensures a smooth transition through customs, without this your goods may be seized.
- Consider the origin of the goods, and whether a preferential duty rate can be used, which is based on trade agreements between the country of origin and the country to which the goods are being imported.
- Agree which party, will assume the responsibility of Importer of Record – they are responsible for ensuring that imported goods comply with all customs and legal requirements of the country of import.
- Establish the appropriate incoterms (international commercial terms), the point at which goods are sold and which entity (buyer or seller), takes the responsibility as the Importer of Record. This will also determine the country in which VAT is payable and the rate of VAT. Getting this wrong, can be expensive in terms of VAT charges that are either irrecoverable or administratively time-consuming / expensive to recover and possibly create a requirement to register for and account for VAT overseas.
- Some goods such as alcohol or tobacco are called excise goods which will be subject to excise charges which means they cannot be sold online in the same way as other goods.
- Other goods by virtue of their nature, such as animal or plants and derivatives will require health certification and, in some cases, also a licence.
- Goods such as high-risk foods, medicines, chemicals, hazardous goods, weapons etc are also subject to special rules and the need to obtain licences and certificates prior to import / export.
- The buyer and seller will then need to agree on the route and means of transportation of the goods. When it comes to international e-commerce, services are offered by the post office and international couriers who will also act as a customs agent providing a process for dealing with customs declarations.
- An important logistics consideration will be the dates for goods to be collected and delivered to their destination. This will have a big impact, for perishable goods, and those required for just in time production, and time sensitive markets, such as Christmas. Alternatively, advance planning for non-perishable goods can see some significant transport cost savings.
Preparing to Import and Export Goods – businesses will need to consider the following:
- An Economic Operator Registration and Identification Number (EORI for short) is required to carry out imports and exports. Use of the correct EORI number is important as it will flow the import and export details through to the owner’s Customs Declaration record.
- Access will also be required to the Customs Declaration Service, (CDS), for both making declarations and downloading documents.
- The Due Diligence which will be required when making Customs Declarations – before engaging in a supply chain, the individual or business will need to understand the customs responsibilities. Ensure that the transactions are not part of a fraudulent activity, understand what rules must be followed, and what duties will be payable, and decide in advance whether the appointment of a customs representative is required. In the case of e-commerce, the use of a recognised international Post Office service or International Courier may be sufficient, so long as the process has been adequately researched, is understood and declarations correctly made.
- How the individual or entity will make Customs declarations and the appropriate software. The rise of e-commerce and internet sales has seen the development of software that will provide a customs declaration service, but this can be quite a maze to navigate.
As the Customs Declaration Service, (CDS) has replaced CHIEF, declarations via the CDS will be required. However, there will be other considerations.
Tax and Duties on Imports
- When an entity acts as Importer of Record, a “Customs pack” of documents will be created, either by the entity or their Customs agent. These will need to be retained for a minimum of the 6 previous years (10 if using IOSS).
- The Customs Declaration Service (CDS) will hold details of the import and export declarations made using the entity’s EORI number. Each month the Postponed VAT Accounting (PVA) Statements and C79 certificates should be available for download, to check and keep with the Customs packs to support the entries made in the accounting records and VAT returns.
- Historic reports of import and export data can also be purchased from the CDS to ensure the completeness of records. This is the same information used by Inspectors of Taxes conducting compliance visits so the taxpayer can ensure their records are complete and correct.
- When goods are imported, and duty is payable the entity has a number of choices:
- To pay the duties at the point and time of entry through Customs which may not be practical.
- To use a Customs Agent who will pay the duties and recharge by way of duty invoice.
- To set up a deferment account (linked to bank account), where duty charges for the month can be charged for settlement by one monthly payment.
Duty forms part of the cost of goods and cannot be reclaimed where correctly charged.
- When goods are imported, import VAT is also payable and again the entity will have a number of choices:
- To pay the import VAT at the point and time of entry through Customs – in which case an import VAT certificate C79 will be issued by HMRC to support a future reclaim of VAT by the entity.
- To use a Customs Agent who will pay the VAT and recharge by way of invoice to the entity (C79 also issued by HMRC).
- To elect to use Postponed VAT Accounting (PVA) whereby no import VAT is paid but entries are made on the next VAT return.
- To charge the import VAT to a deferment account (linked to bank account), where import VAT for the month can be charged for settlement by one monthly payment.
- Obtaining PVA statements and declaring on VAT returns
Where an entity has elected to use the PVA, monthly statements should be downloaded from the CDS portal, and checked to the Customs document packs for individual imports before declaring on the next VAT. As no import VAT has been paid under PVA the entries on the VAT return both declare and reclaim the same amount of import VAT (so long as the import of goods is for business purposes and not for exempt sales), this is just a declaration exercise and no import VAT is payable.
- Reclaiming import VAT paid
Where an entity has paid over import VAT, either at the point of entry, to a Customs Agent or via a Deferment Account a repayment can be claimed so long as the entity has a C79 certificate which confirms that the import has been declared and import VAT paid. A common mistake is to reclaim import VAT charged on a Customs Agent invoice, however the VAT claim should be supported by C79 certificates. It is important to note that under CHIEF C79 documents were posted out to importers but now they are published to the CDS online to be downloaded.
Scrutton Bland has a dedicated tax advisory team who support and advise clients on importing and exporting issues. This has risen in relevance since the change of rules with Brexit, and the increase in Internet and e-commerce sales. They can provide advice and assistance in recovering import VAT, and structuring business models with regards to importing and exporting in a tax efficient manner. Coupled with our SB Digital team we are well placed to support our clients in the modern trading environment. To get in touch, please call 0330 058 6559 or email email@example.com