Logistics, Fulfilment, and VAT in the UK

The New Rules: Benefits and Burdens

The United Kingdom exited the EU on 31 January 2020, and the transition period in the withdrawal agreement ended on 31 December 2020. The EU and the United Kingdom agreed to a detailed post-Brexit trade and cooperation agreement that took effect 1 January 2021. The agreement offers welcome relief by providing a framework for preferential zero-rate tariffs and customs duties, but this does not change the fact that new barriers to trade between the United Kingdom and the EU exist, and complex border procedures must be satisfied because goods traded between the EU and Great Britain are imports or exports. Businesses in Great Britain must familiarize themselves with the procedures and administrative requirements for VAT and customs reporting on imports and exports into and out of the EU and the United Kingdom, and they also need to consider non-tax regulatory requirements, such as EU health and safety, labelling, and import/export licensing requirements, on a country-by-country basis. Likewise, EU exporters bringing goods to the United Kingdom must meet similar UK requirements and must take note of special rules for Northern Ireland.

Further complicating matters, under HM Revenue & Customs’ revised policy on import VAT recovery (updated in October 2020) only the owner of imported goods can reclaim UK import VAT, including via the new postponed import VAT accounting scheme. If the importer is not the owner, the parties risk incurring potentially irrecoverable costs. In practice, this means that the owner must be the importer of record or at least a consignee on the UK import declaration. A wide range of supply chains are affected by this revised policy, which may present practical challenges for many businesses, including those using leasing arrangements. (Notably, undisclosed agents who act in line with section 47 of the UK VAT Act 1994 - that is, in their own name, as if they were owner - can still reclaim import VAT as input tax, subject to the normal rules.)

For example, if retailers use customs warehousing when sourcing overseas goods, then HMRC’s latest guidance advises that the retailer must take ownership of the goods before the goods are removed from the warehouse — rather than at the time of delivery to the buyer’s premises — to allow the buyer to act as importer of record and recover the import VAT. Businesses must be mindful of HMRC’s rigid approach and mitigate the risk of irrecoverable import VAT by reviewing existing contract terms, particularly regarding ownership, as well as terms concerning key matters such as storage, delivery, carriage or shipment, transfer of risk, loading and unloading of goods, and customs clearance responsibilities. This includes reviewing the use of Incoterms, which are maintained by the International Chamber of Commerce and are typically referred to using three-letter acronyms. Incoterms are broadly accepted rules and definitions for terms that are often used in commercial contracts for the sale and delivery of goods, and they seek to clarify which party will complete export and import customs clearance formalities.

Because of these various changes, business-to- business (B2B) contracts are moving away from the ex-works arrangements used pre-Brexit to terms that are nearly the opposite, such as a delivered duty paid (DDP) arrangement, an Incoterm that ultimately requires EU sellers, in particular, to register for UK VAT — which was not necessary pre-Brexit particularly in a B2B scenario — and deal with UK import formalities and the various customs implications of importing their goods to the United Kingdom.

This trend is likely to mean these suppliers will also consider their future supply chain requirements for fulfilment storage facilities in Great Britain in order to support demand for and returns of imported goods.

Meanwhile, as of 1 January 2021, there is a complex new system for the UK VAT treatment of low value consignments of goods — that is, with a consignment value that does not exceed £135 — arriving in Great Britain from outside the United Kingdom. The new model moves VAT collection for low value imported goods away from the UK border. Instead, it places the responsibility for accounting for the UK VAT on all such goods at the point of sale and, depending on the circumstances, on the seller, the operator of the online marketplace that facilitated the sale, or the recipient if it is UK VAT-registered. Online marketplaces (whether based in the United Kingdom or overseas) can be deemed responsible to account for the UK VAT on business-to-consumer sales of goods of any value, taking the place of non-UK-based sellers that make sales to consumers in Great Britain via the marketplace when the goods are already located inside Great Britain at the point of sale. In those circumstances, the overseas seller would be treated as having made a zero-rated sale to the marketplace operator. Unique rules also apply to sales of low value consignments into Northern Ireland, and the EU will begin to apply a VAT model like the United Kingdom’s — but even more complex — on 1 July 2021.

These increased complexities for online sellers and marketplaces, both in the United Kingdom and soon across Europe, will vary depending on several important factors. One key factor will be where goods are held and located at the time of sale to a customer. Online marketplaces — especially those involved in fulfilment — are therefore adjusting to the new tax landscape in a variety of ways to protect their customer bases. Some are responding by making use of new third-party operated fulfilment warehouses for overseas sellers and some are transitioning to an undisclosed agent or commissionaire structure for deliveries to consumers. Other online marketplaces are refusing to move goods across the UK/EU border, encouraging sellers to send sufficient inventory to separate fulfilment centres in the United Kingdom and the EU to avoid business disruption and ensure a positive consumer experience, thus placing cross-border shipping burdens on sellers, including responsibility for meeting local VAT and customs requirements on, for example, a DDP basis.

The combination of Brexit, the acceleration of online business brought on by the COVID-19 pandemic, suppliers and marketplaces grappling with the new VAT rules on e-commerce sales of low-value consignments of goods to consumers, increased demand from customers to use DDP terms (that is, moving VAT and customs responsibilities away from customers and onto suppliers or marketplaces), and HMRC’s view that only owners of goods can recover UK import VAT costs, encourages businesses to review their supply chain needs and consider holding more stock locally in the United Kingdom and elsewhere to mitigate against future import delays, costs, and disruption. Consequently, businesses are looking to the logistics market for fulfilment and storage space support.

Fulfilment Houses

Notably, businesses looking to take advantage of interest in the provision of warehouse storage space must be careful because it will bring new responsibilities, including under the UK fulfilment house due diligence scheme (FHDDS). Broadly, the goal of the FHDDS is to help HMRC deter and disrupt abuse by noncompliant overseas suppliers selling goods to UK customers, including through online marketplaces. While this scheme has been in force since April 2018, its scope has been widened because of Brexit to include businesses that store third-party goods in Great Britain for all non-UK established suppliers and not just suppliers based outside the EU. (Pre-Brexit rules will apply for Northern Ireland; that is, the rules only apply when storing for non-EU suppliers.) Broadly, the FHDSS requires fulfilment houses to apply for approval from HMRC to operate their fulfilment house business in Great Britain before they begin trading. The scheme will apply to businesses that want to store any goods that were imported from outside the United Kingdom, owned by or stored on behalf of non-UK-based suppliers, and are being offered for sale (having not been sold in the United Kingdom previously), and it will also include the storing of goods that will be released for free circulation after being stored under a customs-bonded regime. HMRC advises that affected businesses should apply even if they do not consider themselves a fulfilment business or they have already registered with HMRC for other schemes that require due diligence on customers.

Brexit transitional rules will apply for some fulfilment houses with only EU-based customers. In particular, businesses that start carrying on a new fulfilment house business limited to EU-based customers between now and 30 June 2021 will need to apply for FHDDS approval before 30 June. Businesses that start carrying on a new fulfilment house business for non-UK-based customers (that is, not limited to EU-based customers) between 1 July and 30 September must make an application for approval for the FHDDS before 30 September.

Once approved, the fulfilment house business will be shown on HMRC’s list of FHDDS-registered businesses, raising its profile with HMRC and potential customers. Registered businesses must also fulfil the following obligations:

• keep detailed records containing specified information for up to six years;
  
  
• complete robust due diligence checks on the overseas suppliers that use the warehouse space and on the goods stored;
  
  
• notify customers of their UK VAT and duty obligations;
  
  
• notify HMRC within a specified period if the fulfilment house knows or has reasonable grounds to suspect that a customer is not meeting its UK tax and duty obligations; and
  
  
• cease to provide services to a non-compliant customer within 60 days if the customer fails to take necessary actions to meet its obligations.

Significant sanctions can apply if a business fails to register with HMRC under the FHDSS when it is required to do so (subject to certain Brexit transitional rules), including fines up to £3,000 for late registration, being prevented from trading as a fulfilment business, forfeiture of stored goods, a civil penalty of £10,000, and even a criminal conviction. Approved fulfilment businesses can also be liable for penalties ranging between £500 and £3,000 per failure to comply with the various FHDDS requirements. Therefore, when it applies, the application of this scheme must be carefully monitored.

Beginning 1 April 2022, increased due diligence will also be required from some fulfilment businesses that could face secondary or joint and several liability for a new tax being introduced in the United Kingdom on plastic packaging (including imported filled packaging and goods packaging) that does not contain at least 30 percent recycled plastic. Broadly, a relevant operator may become liable if it knew or had reasonable grounds to suspect that a client was not complying with the tax but did not take steps to ensure compliance or to stop dealing with that particular client. The UK legislation introducing these new measures has not yet been finalised.

Construction Services

Those looking to the construction sector for the development of new warehouse space should be aware of the United Kingdom’s new VAT reverse charge for construction and building services, which took effect 1 March 2021. This is an anti-fraud measure, and it is a major change in the way VAT will be accounted for on such services. Under the new rules, HMRC requires the application of a domestic VAT reverse charge for most supplies of standard- and reduced-rated building and construction services to UK VAT-registered businesses when such supplies need to be reported within the construction industry scheme, in particular, for supplies from subcontractors to their main contractor customers that will, in turn, make onward supplies of the relevant services. This will affect subcontractors’ cash flow because they will no longer be able to charge VAT on their services — instead, main contractors will account for the UK VAT due on their UK VAT returns, which may affect pricing. However, end-users (such as consumers), business customers (such as landlords, property developers, and tenants), and some linked intermediaries that receive the services should themselves be exempt from the new VAT reverse charge requirements.

This piece was first published by Tax Notes International.