All overseas businesses now required to register for the tax, collect the money and pay HMRC

Changes to the UK’s cross-border value added tax rules that coincided with Britain’s departure from the EU single market at the start of the year have created “chaos” for direct mail orders, resulting in refusals to trade, delayed orders and opportunities for fraud.

On January 1, the UK implemented a change in the rules for foreign mail-order sellers, insisting they register for UK VAT for any items sold to UK customers, collect the correct sales tax on behalf of the government and pay the money to HM Revenue & Customs. The changes were not directly linked to Brexit because the UK could have applied its existing rules for non-EU mail orders, which stipulate that VAT is added as goods enter the UK.

But officials believed they did not have the capacity to police such a move and so decided to force all foreign sellers to register for UK VAT to sell to British consumers. The difficulties in mailing orders across borders will be compounded by an increase in fraudulent trade, say campaigners for fair taxation, because HMRC has stopped policing VAT on mail-order imports at the UK’s borders.

Smaller EU foreign traders have criticised the new bureaucracy because they used to charge their domestic VAT rates. Some have even refused to supply to the UK. Dutch bicycle parts company Dutch Bike Bits said it was “ludicrous for one country” to insist on these onerous conditions and it would, in future, “ship to every country in the world . . . except the UK”.

The confusion among smaller companies is so great that some EU companies have refused to supply UK customers because they are under the mistaken belief that they need to apply tariffs. Didriksons, a Swedish coat maker, has delayed orders under the impression that Brexit “imposes a customs duty on all trade to and from the UK”. Companies caught up in the confusion include Brooks, the British leather bicycle saddles manufacturer based in the West Midlands.

The company was unable to supply UK customers on Monday because it distributes goods from Italy. Brooks said it could not supply British customers because its products were, “shipped first to our logistics centre in Italy and from there to cyclists around the world”. Richard Asquith, who runs global indirect tax at Avalara, a tax consultancy, said there was “chaos in ecommerce” following the rollout of the new rules. Reputable foreign companies would be unable to comply with the new distance-selling rules quickly because HMRC was taking about two months to complete VAT registrations, he said.

For UK-based companies selling to EU customers, Mr Asquith added, Brexit-related red tape meant some businesses had decided it was not worth exporting to smaller EU markets any longer. Rules for these companies will change again in July when the EU introduces a one-stop shop for non-EU distance sellers to apply VAT correctly for all sales in each country.

HMRC has to check more than a million additional parcels a day for VAT compliance following the UK’s exit from the EU single market, and although it says it “will continue existing fiscal compliance checks”, UK retailers are worried that the tax authority will be swamped and unable to spot the difference between legitimate parcels with UK VAT paid remotely and those that dodged the new system.

Richard Allen, who runs the campaign group Retailers Against VAT Abuse Schemes, said: “If you don’t plug the loopholes, it distorts competition in no time.” HMRC was unable to provide information on how many foreign sellers had registered for UK VAT in advance of the new rules.

It said it was “developing a comprehensive compliance response in order to tackle issues of non-compliance by overseas direct sellers and online marketplaces” but could not confirm what powers it had over companies in other jurisdictions.

ft.com