Croner-i: Taxing the elephant in the room
Background to online retail
Online retail is, relatively speaking, a young industry. It only really came into its own in the early 2000s. Of the brands associated with the online retail phenomenon, Amazon is the most well-known; yet for the majority of the 1990s Amazon was seen as a loss-making curiosity. Today, Amazon is an online giant with over 60% of its sales made by third party sellers operating on the Amazon Marketplace and a level of technological innovation that has changed the way that we shop.
Whilst ex-HMRC boss Lin Homer famously described online retail as something that happens ‘in the ether’, the truth is that online retail is mail order, an industry that has been with us since 1861, when Welsh entrepreneur Pryce Jones realised that he could utilise the then new postal service and railway network to sell clothing via printed catalogues to customers all over the world.
In terms of basic principles, mail order today is no different from the time of Pryce Jones. However, catalogues have been replaced by the internet, and the internet has enabled international barriers to be broken down, making it easy for anyone to sell goods mail order on a global scale. Catalogues have been replaced with websites that are updated in real time, and language is no longer a barrier to trade. With modern payment services and logistics, goods can be sold and shipped internationally within short timescales and at relatively low cost.
The problem
The problem is that the regulatory infrastructure that governs online retail has remained stuck in the Victorian age, with outdated manual customs inspections and tax authority’s incapable of collecting import taxes efficiently due to the enormous increase in international mail order consignments. Gaping holes in customs regulations and procedures have been abused by ever more inventive online retailers, and Governments have been slow to wake up to the problems this has caused. Domestic retailers that have outsourced production of their goods to China have found that they are having to compete with Chinese businesses who have realised they are in position to undercut those UK importers by selling directly to UK consumers and thus cutting them out.
The growth of this trade has been accelerated by subsidised postage rates and Chinese government export incentives enjoyed by Chinese sellers, whilst low value bulk regulations and ‘de minimis’ import tax exemptions (a de minimis import tax exemption is a fiscal threshold value below which customs duty and/or VAT is not charged) have allowed Chinese retail outlets such as SHEIN and TEMU to sell directly to UK consumers on an individual basis. The advantages afforded to them by outdated regulations have allowed these companies, and others, to avoid the import VAT and duty that would have to be paid by a UK retailer importing the exact same goods as freight.
Because mail order has traditionally been seen as a fringe activity in the world of international trade, and politicians do not want to be seen interfering in what is regarded by the public as a perk, action to correct the imbalance has been slow. A lack of awareness or even interest in correcting these imbalances in regulations means that they have persisted. The truth is that a significant volume of international trade is now online mail order, and the problems associated with it need to be taken far more seriously by both politicians and regulators. The abuse of de minimis import tax exemptions is now a global concern. Companies like SHEIN and TEMU have legitimately exploited these outdated exemptions and flooded Asia, Europe and America with low value goods assisted by generous Chinese Export Tax Rebates and subsidised international postage rates overseen by a secretive Universal Postal Union Treaty.
Fixing the problem
There is a need for a practical and considered approach to this problem. Do Western economies wish to allow Chinese goods to be imported and sold directly to consumers with no tax or tariffs applied to them? Common sense would dictate that to do so endangers domestic competition and manufacturing and is of no benefit at all to the economy.
Sadly, in the UK there is a long history of Government ignoring the problems caused when import rules are exploited by online retailers. Back in the early 2000s, Low Value Consignment Relief (LVCR) was exploited by the Channel Islands VAT-free mail order industry, on an industrial scale and to the detriment of many small retail businesses, including my own. The full saga of how I, successfully, campaigned for it to be ended can be read in Will Dunn’s excellent feature The Record Shop, The Taxman and the Missing Billions published in the New Statesman in September of 2020.
Low Value Consignment Relief (LVCR) was an exemption from VAT intended for administrative simplification, it relieved low value packets from import VAT and applied to all imports into the UK, which prior to Brexit did not include goods sent from the EU. Before its abolition, the value threshold for LVCR had been set at £18 since 1996 and was lowered to £15 in 2011 but there was an overly generous additional £5 permitted for postage and packing. Taking advantage of the Channel Islands’ proximity to the UK, subsidised postage rates and expedited customs arrangements, online retailers deliberately sent goods on a round trip from the UK mainland to the Islands to gain the exemption on their return to UK consumers. Shockingly, this abuse involved major UK High Street retailers and was not only permitted by HMRC but was supported by the Treasury with arguments that claimed it saved money and was operated entirely within the rules. The impact on UK retail was ignored for well over a decade, and it took a complaint to the European Commission (EU Complaint Ref 2009/4458) and the threat of infraction proceedings to bring HMRC and the UK Treasury to their senses and finally remove the exemption from Channel Islands Mail order goods in April of 2012 (although it remained available to imports from other non-EU territories). The trade immediately collapsed. It was an extreme example but one that showed the UK at least seemed to have a limited grasp on the harm that unregulated mail order imports could inflict on the UK economy.
Since 2012, thanks to the increase in internet shopping, the importation of goods that are sold directly to the consumer (as opposed to being sold via a UK intermediary) has grown exponentially. In April 2017, the National Audit Office published its report Investigation into Overseas Sellers failing to Charge VAT on Online Sales. This highlighted abuse by Chinese retailers who shipped goods into UK warehouses with mis-declared import values and then sold them on Amazon and eBay whilst not accounting for VAT on the sales. The report was critical of HMRC’s slow and ineffective response to the problem. In a PAC hearing examining the findings of the report in September 2017, Jim Harra of HMRC estimated that new Online Marketplace Joint and Several Liability legislations would raise approximately £350m annually. This legislation required online marketplaces to display sellers’ VAT numbers or become liable for any unpaid VAT. It did not work effectively because non-UK sellers either listed cloned VAT numbers or simply defaulted on VAT and set up under another name, leaving HMRC to pursue VAT debts from the out of reach overseas individuals who hid behind paper UK identities. Despite claims made by HMRC that the legislation made online marketplaces liable for VAT, it only did so if the online marketplace refused to remove any seller found to be evading VAT, which of course never happened. Campaign groups Retailers Against VAT Abuse Schemes (RAVAS) and VATfraud.org stated that £1bn in VAT was being lost to fraudsters on Amazon and eBay alone, and their criticism of HMRC’s performance was detailed in the NAO report.
It is also worth noting the ease with which non-UK sellers have been able to obtain a VAT number and a Limited Company. More ID is requested to withdraw a library book than is required to obtain a company or a VAT number in the UK. This lax regime has enabled fraud on an industrial scale.
Brexit impact
In 2021, some progress was made. Due to the huge increase in mail order imports, the EU had been planning since 2015 to abolish LVCR and collect VAT on all imports. The planned implementation date had originally been 1 January 2021, which coincided with the UK fully leaving the EU and abolishing LVCR on the same date. However, due to technical problems the EU delayed its abolition of LVCR until July 2021. The UK thus abolished LVCR six months before the EU. There were, however, major differences between the way the UK and the EU intended to collect VAT once LVCR was abolished.
The EU created a dual path for the collection of VAT on low value consignments (€150 or less) imported into the EU (including Northern Ireland). Either the seller could register under the Import One Stop Shop (IOSS) and pre-pay the import VAT or the carrier could collect the VAT and additional clearance fees from the recipient. Because of the higher cost of paying VAT and clearance fees to the carrier and the inconvenience to customers, the hope was that sellers would opt to use IOSS.
The UK took a different approach, introducing legislation that:
(i)obligated online Marketplaces such as Amazon and eBay to collect VAT on sales made by sellers not established in the UK; and
(ii)obligated all non-established sellers not using an Online Marketplace, to register for VAT in the UK.
The removal of LVCR had an immediate and effective impact on online retail VAT fraud in the UK. The UK Office for Budget Responsibility noted in their economic and fiscal outlook dated October 2021 that HMRC’s 2017 expectation of a VAT yield for the year 2021–22 did not accord with the outturn data for same period, after the removal of LVCR and the implementation of the collection of VAT by online marketplaces. They contrasted HMRC’s 2017 prediction of £0.3bn against the revised figure of £1.4bn in 2021–22, which was expected to rise steadily to £1.8bn by 2026–27. These figures appeared to underscore the ineffectiveness of the Joint and Several Liability measures prior to the removal of LVCR vs the effectiveness of making Online Marketplaces collect the VAT after that date.
However, despite a move in the right direction, there remains a major flaw in the legislation. Unlike the EU, which has retained the old method of assessing VAT and collecting it from the carrier where VAT is not being pre-paid under IOSS, the UK has, in effect, completely abandoned VAT assessment on all packages with a value of £135 or less. Whilst UK legislation obligates non-UK sellers/marketplaces to register for/collect VAT, the practical reality is that UK legislation cannot create an obligation in another jurisdiction. HMRC do have powers to pursue UK agents, brokers and warehouses where there has been an under declaration of the value of goods being imported but have no powers to pursue anyone where the value of goods has been correctly declared and a non-UK-retailer has simply ignored the obligation to register for VAT in the UK. Given that unlike IOSS, nothing identifies the VAT status of the sender on the package and UK border assessments of VAT on packages less than £135 in value have been discontinued, HMRC would not even be aware of overseas mail order businesses failing to register for VAT in the UK.
As can easily be seen by placing test purchases, those ignoring the UK’s obligation to register for VAT can sell goods to UK customers at a distance, and send them to the UK in the certain knowledge that, if they are below £135 in value, no VAT assessment will be made at the border and the goods will be delivered to the UK customer promptly. In the EU, where VAT has not been prepaid under IOSS, goods are still subject to VAT assessment by the customs authorities. Furthermore, several EU member states insist on a VAT representative who will be ultimately liable for any VAT unpaid by the seller.
The EU arrangements are far from perfect; the IOSS reference number only identifies the sender, not the individual transaction and could easily be cloned, whilst packages not utilising IOSS require manual inspection, but the measures are far more robust than the UK’s unenforceable Overseas Seller VAT registration legislation. To present this legislation as a solution is highly misleading.
The flawed 2021 rules have created a newly evolved level of abuse in the UK. For example, large shipments of goods can be sent to the UK individually packaged as consignments of less than £135 in value. Under the new Bulk Import Reduced Data Set System (BIRDS), entire container loads of goods can be declared on a spreadsheet, in short form. Undervaluation is hard to detect, and bulk shipments of low value consignments will not attract VAT or duty if each package is addressed to an individual in the UK and is valued at less than £135. Large consignments of goods are thus split into hundreds of smaller consignments and addressed to fake individuals or one of the many hundreds of thousands of mysterious Chinese companies that have been set up at Companies House. Once the goods have cleared customs, these bulk consignments are broken down and the goods are sent to warehouses from where they are then sold on eBay, Amazon or elsewhere. Once the goods are in a distribution warehouse it is virtually impossible for the customs authorities to determine who is the beneficial owner.
HMRC action
HMRC are currently retrospectively pursuing freight agents for VAT, who have unwittingly been caught up in undervaluation scams involving these low value bulk imports, but this has not prevented the abuse of BIRDs or the goods reaching UK consumers tax free, or the ingenuity of sellers determined to mislead customs.
Another common abuse is to create a bogus UK company to appear to be established in the UK and thus avoid the collection of VAT by Online Marketplaces. Where fake identities are being used by those intent on circumventing the rules, Online Marketplaces have struggled to distinguish between sellers that are genuinely established in the UK from those who are not. The confusion has been exacerbated by a general lack of understanding of the rules of establishment by sellers and the ease with which a UK company and VAT number can be obtained. More recently a trade in established UK eBay private seller accounts has enabled non-UK sellers to pretend to be private individuals in the UK. It’s the Wild West, wherein inconsistent and confused regulations cannot be policed effectively.
If an item is sold directly to the UK consumer from outside the UK with no tax applied, then there is no real benefit at all for the UK economy. Libertarians might argue that UK consumers have the advantage of low-cost goods and more money in their pocket but when compared to the loss of tax revenue and employment this is, in my view, nonsense. There is a very simple set of solutions to the problems caused by non-UK online retailers being able to avoid paying UK VAT on their sales.
(1) Make online marketplaces collect VAT on all sales made by sellers whether they are established in the UK or not. In the case of those using Online Marketplaces, as opposed to selling direct, this would greatly simplify collection for the seller and the tax authorities and remove the need to determine where the seller is established.
(2) Make any non-resident seller who applies for a UK company or VAT number appoint a VAT representative in the UK who is responsible for paying import tax debts should the seller abscond.
(3) Make customs brokers responsible for the correct value declaration of goods that they import for their clients, the safety of those goods, and for the payment of any VAT and duty.
(4) Legislate so that all imported goods held in UK warehouses are clearly marked with the name of the beneficial owner.
(5) Abolish the subsidy enjoyed by Chinese sellers enabled by the Universal Postal Union Treaty.
(6) Increase the cost of unrealistically cheap imports whether that be through increased duty, enforced partnership with a UK company, the extension of duty to more classes of goods or the application of fixed fees for clearance. Other countries have adopted measures like these, for example VAT has recently been imposed on all low value imports by South Africa and a similar measure is being considered in America. In India, SHEIN has been forced into a partnership with an Indian company ensuring that value is added to the benefit of the Indian economy.
The future
The Labour Government has so far made no move to deal with Chinese imports and has not indicated it has any plans to change existing arrangements. This may be due to a desire to attract SHEIN to float on the UK stock market. If this is the case it is, in my view, a mistake. If SHEIN’s business model is reliant upon avoiding import taxes, then they are no different from the now defunct Play.com that abused LVCR via the Channel Islands entirely to the detriment of the UK economy. SHEIN’s wish to float on the UK stock exchange should not be offset against any abuse of the UKs import tax regime. Preventing that abuse would not only protect UK competition, but it would also raise significant sums of tax for the Treasury and encourage domestic wholesaling and manufacturing. The most recent published annual report by HMRC shows that the UK collected a mere £5.6bn in customs duties. It seems obvious that this could easily be increased. Customs duty rates in the UK are presently low. Half of all products attract no duty at all. It is more attractive for manufacturers and consumers to import materials and goods from overseas because there is little or no incentive for them to source from within the UK (see Ian Worth’s excellent article on this subject). When the Channel Island LVCR Mail Order trade was facing shutdown in 2012 defenders, including the Treasury, claimed that ending the trade would result in the collapse of physical music sales because CDs and vinyl would become too expensive. However, even though physical music products have increased in price, the ending of the Channel Islands’ abuse of LVCR in 2012 has seen record shops thrive whilst physical music retail has gone from strength to strength.
The recent NAO report Tackling Tax Evasion in High Street and Online Retail, to which RAVAS was a significant contributor, has highlighted these problems and the inertia of Government agencies with regards to effective action. I am hopeful that the new Labour Government will realise what needs to be done but I believe that what is required is some kind of Commission that can oversee and organise the kinds of structural collaborative changes that need to take place. I do not believe that leaving each Government agency to continue to apply sticking plasters, when prompted, will in the longer term achieve what is required. I began campaigning on this issue 20 years ago and so far, progress has been painfully slow.
Given the state of the UK’s finances, securing an income stream from imports and protecting the domestic marketplace from competitive abuse would appear to be a no brainer.
