Small businesses face £180m VAT hit from Brexit red tape

Businessmen covered in red tape.

British online retailers are facing at least £180m in additional costs as the EU introduces new VAT rules on sales coming from outside the bloc.

Many small UK companies will have to pay €8,000 (£6,900) a year to comply with new rules set to take effect in July, according to consultancy Avalara.

The rules are aimed at cracking down on VAT fraud among predominantly China-based ecommerce sellers, the cost of which is expected to rise to €7bn this year.

Brexit means they will also apply to companies based in the UK, meaning more than 26,000 sellers will need to register for the first time under the new EU system, according to Avalara.

Richard Asquith, vice-president of global tax at Avalara, said: “The problem is the UK is out of the EU so we get treated like the Chinese sellers who are the root of the problem.

“So it's a bit of a sledgehammer to crack a nut, which is no consolation for UK micro businesses.”

He said the 26,000 company count estimate, first reported by the Financial Times, was “conservative”, warning that the red tape could affect a further 100,000 firms.

Companies can use the Import One-Stop Shop (IOSS) system to register to pay sales tax in the bloc, a process which the European Commission has estimated carries compliance costs of €8,000 per year.

Alternatively, they can subcontract VAT to selling platforms such as Amazon – which usually carries higher overall charges – or ask the postal service to handle the taxes.

Mr Asquith said companies that conduct more than around 100 transactions a year with the EU would be best served by registering for IOSS.

The new rules mirror those introduced by the UK at the start of the year, which forced all foreign mail-order sellers to register for UK VAT for items sold to British customers.

The change, which resulted in order delays and some companies refusing to sell into the UK, took place because officials were concerned the UK did not have capacity to ensure VAT was being applied as goods entered the country. Mr Asquith said the VAT rules constituted another post-Brexit trade barrier for businesses.

“Businesses just feel like they're walking through a minefield,” he said. “They get past one mine, and then they find the next one.”