Business Finance: Wayne Neal explains EU proposals to extend the rules on distance selling

Wayne Neale, associate director at BDO LLP. Picture: BDO

Wayne Neale, associate director at BDO LLP. Picture: BDO - Credit: Archant

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.

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’. They 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 euros or 100,000 euros.

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. Until now, some vendors have not breached these distance selling thresholds because their business has chosen to separate the supply of the goods from the service of delivering them (ie, a separate company delivers).

However, HMRC has changed its interpretation of the term ‘dispatched or transported by or on behalf of the supplier’. It now says distance selling rules apply where the supplier intervenes directly or indirectly in the transport or dispatch of the goods.

Examples, include where the vendor subcontracts delivery work to a third party, or actively promotes delivery services of a third party and/or puts the customer in contact with a third party carrier. UK internet and mail order businesses that use 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 much larger historic VAT liabilities and penalties. The change in HMRC’s guidance suggests that it intends to actively pursue this new policy with retailers. Businesses selling goods online or by mail order to EU consumers should therefore take immediate action to review their position.

•Wayne Neal, is an associate director at BDO LLP in Ipswich, in charge of indirect taxes.

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