Budget 2016

[graeme jones]

Buried away in the middle of today's Budget speech was a sentence which went something like "The Government will take measures to stop foreign companies avoiding VAT by storing goods in the UK and selling them online".

None of the TV commentators have mentioned this yet and no detail has been given. It could increase prices of goods from one of our favourite suppliers by 20%.

Graeme

[Brian Spearing]

But you could still buy from the Europe warehouse without paying VAT?

[Ken Webster]

The HM Treasury 2016 Budget publication has some more information (see below) but lacks detail.

Tackling VAT evasion by overseas sellers

1.218 The government is taking firm action to protect the UK market from unfair online competition. Some overseas traders from beyond the EU avoid paying UK VAT, undercutting online and high street retailers and abusing the trust of UK consumers who purchase goods via online marketplaces.

1.219 Budget 2016 announces action that will help to protect consumers and level the playing field for businesses. HMRC will be able to require non-compliant overseas traders to appoint a tax representative in the UK, and will be able to inform online marketplaces of the traders who have not complied. If traders continue to evade VAT and no action is taken to prevent the fraud, then online marketplaces can be made liable for the VAT.

1.220 The government will also introduce a due diligence scheme for the fulfilment houses where overseas traders store their goods in the UK. This will make it harder for VAT evading firms to trade. While the government continues to take action domestically, the global nature of the fraud means international action is also required. The UK has already raised this issue with EU and international partners and the EU and OECD’s current work programmes include further work to help combat this fraud.

[kc]

until we vote to leave the EU in July.......

It's taken years for the government to realise this was happening even though we were talking about it here years ago. Now it's too late - so many model shops have closed due to this unfair competition. Probably many other types of trade we don't know about too.

[IanN]

Pretty staggering it hasn't been addressed until now.

Perhaps, in the overall scheme of things within the context of a national economy, it's small beer

[kc]

The Treasury publication suggests this is action against VAT evasion while we all assumed certain model traders were just using a legal loophole and doing nothing illegal. So maybe it won't affect our supplies.....

[Tony Smith 7]

Do you have a link to that publication? I was trying to work out what exact behaviour is being referred to. Do you mean that retailers are importing stuff to UK warehouses but declaring it as in storage (presumably bonded) rather than imported? If that's the case I wonder how they manage to get the stuff out of bond for delivery without going through the import process.

[Biggles' Elder Brother - Moderator]

Its interesting that in the extract above the Treasury appear to be using the term "fraud"! That's very hard line! Like many, my understanding has been that what is being done here is the exploitation of a loop-hole in the law - therefore whilst not what was intended, it is not illegal. But the use of the term "fraud" surely contradicts this? And if it is "fraud" why do we need new rules to stop it? Surely if its "fraud" HMRC can simply act directly now - round a few bods up and prosecute? Don't see that happening though - very confusing!

Also, despite all the "tub thumping" the actual action being taken seem to me very indirect. If I read it correctly it implies that unless certain "retailers" appoint this "tax representative" (whatever that is!) the sanction will ultimately be agianst the on-line marketplace. So does that effectively mean that if such a retailer offers good through, say ebay, as well as directly, then ebay can be sanctioned - but the reatiller can't? I can see that would discourage organisations like ebay from offering a marketplace to such retaillers - and that might be the intention. But what about the large retailler that has his own website marketplace and its in the Cayman Islands - what then?

I'm no accountant (thank God!) and no Lawyer (another thank-you Lord) but I'm completely confused by this!

BEB

[Andrew Price 2]

I was going to buy a DSLR camera online until I realised that the seller was claiming uk stock but on checking his listed address was in Hong Kong. I bought my camera elsewhere because I could foresee mega problems getting after sales support. At the time I wondered if some sort of tax scam, perhaps similar to the old purchase tax export/reimport scam, but could not work out how the stuff could be imported, without paying at point of import, or when withdrawn frpm bond. This thread is going to be an eyeopener.

I wonder who else is thinking of an extremely well know personality who got caught perpetraiting multiple purchase tax frauds and basically got away with it!! Nothing to do with his father who, by sheer coincidence was a senior high court judge!!

[Frank Skilbeck]

What the supplier could do, is send the goods to his UK warehouse with little or no value declared for them, if they were then sold by a UK registered business then VAT would be payable on the sale price, but if the purchase transaction takes place outside the EU (with say the companies office in China or HK) then the value of this sale isn't seen in the UK. Theoretically the UK purchaser should declare the purchase and pay the VAT as they have then imported the goods and have a value against which VAT can be calculated.

If you were a UK business charging and paying VAT there'd be no incentive to declare a low value on the goods back as you can reclaim the VAT you've paid , but if you weren't a UK registered business selling the goods from the UK then declaring a low value would keep the tax (and duties) paid to a minimum. So effectively if you import something and declare a value of say £10 on import you pay £2 VAT, if you are a UK business and sell it for £100 you collect the £20 sales VAT for HMRC but you can claim your £2 back, if you are a non UK business and payment is made outside of the UK then the UK taxman misses out on the sales VAT.

If you want more https://www.gov.uk/guidance/importing-goods-from-outside-the-eu

VAT works out at about 17% of UK tax collected, about the same as N.I.

[Andrew Price 2]

Thanks for that Frank. Either they misdeclare import and the consignment is not inspected ( they cant do them all), or HMRC are so thick they are not realising the true value of the items being imported!

I suppose you can also imagine a situation where a payment from the buyer for the full price via PayPal could go straight out to the sellers country so they would trouser the entire VAT on the purchase price.

The question then is. How do they explain to HMRC why VAT payments during import do not have corresponding VAT activity at the point of sale!

No wait!!

The import price has been depressed so much using your scheme that they can sell several items "off books" and still show a reasonable margin on thier books for the one or two that they do actually show on the books.

[graeme jones]

I suspect that HMRC are hamstrung by EU regulations over which HM Government have no control. Is it tax evasion or a "legal until the courts say otherwise" tax avoidance scheme? I too have never understood how goods can be imported in bulk from outside the EU without paying VAT at the docks/airport. HMRC would soon find out if this was being done. Wouldn't they?

Graeme

[Andrew Price 2]

You would think so, Graeme.

[kc]

I think Frank is right -that's the way it happened.

Nobody at HMRC really knows what the items are if they are just marked " Toy Aeroplane Parts" with just a part number. They cannot reconcile that internal part number with item description we buy or the price it. eventually sells for.

[Frank Skilbeck]

What you are all missing is that if you undervalued goods you were bringing in for resale, you'd be doing yourself no favours as your profit would be falsely inflated (more business tax) and you still have to charge VAT anyway. What is happening with overseas businesses is that they undervalue the goods and only pay VAT on that value, but because the end user sale transaction takes place outside the EU the UK taxman doesn't see what the good are sold for.

If you ever watch Dragons Den they will often ask how much something costs to make and will be told is £1 each in China and we sell them for £10, now if they could do the transaction outside the EU then the only tax they'd pay would be on the £1.

Remember when you could specify to an overseas seller what value you wanted to declare

[Erfolg]

I am probably thick.

If any company sells an item at £100, then vat at 20% is payed. If the company imported the item with a face value of £100, then no profit is made, so then there is no Corporation tax to be paid, probably an operating loss.

If the item cost the business £50 to purchase and ship, I accept that they take their profit outside of the UK. Yet in essence that historically always happens to some extent when goods are imported. Be it coffee, wheat, or models, profit is made along the the sales path.

Is it any worse than the convoluted trading system that can be the norm for UK model retailing and wholesaling that is common historically in the UK model trade, where lots of people take a profit.

If it were cars made in the UK, we would say we are entitled to the profit of the added value. Why is it wrong for those in Asia to want the added value that comes from manufacture, rather than see retailers taking all the profit from the value that the manufacturer creates. 

Edited By Erfolg on 18/03/2016 21:18:42

[kc]

They (whoever they are - you decide!) may not undervalue the goods. They may just submit a genuine suppliers invoice and pay the VAT correctly. Then the firm that pays the import VAT can deduct it from the VAT they charge - if they have another side to the same business then that may generate a lot of VAT. You will note that the various model suppliers we know off ( or knew ) have a haulage company that actually does the work of posting the goods to us. No doubt that haulage company has lots of other business which charges lots of VAT on its haulage. Hence maybe no actual money gets paid to the Revenue for the import of our model goods!

Of course I don't know if that is what happens, ...........

Don't be surprised if your favourite supplier suddenly ups the prices by 20percent quite soon!

[kc]

Erfolg. You are assuming you are paying VAT when you buy from these suppliers. You are not. You do not get a VAT invoice with your goods. We had this discussion a few years ago when you said that as the goods were being despatched from Cornwall they must be charging us VAT. At that time I asked them ( the firm supposedly in Cornwall ) for a VAT invoice and they replied saying they cannot supply a VAT invoice as they were not a UK company.

[GONZO]

Could be wrong but I believe you can use what is known as 'intrinsic value' if you are not going to sell the items in the UK via a retail outlet. Whats a bit of foam worth? Next to nothing. Of course you dont say that its formed into a model aircraft. Dont think you have to using this method. Small amounts of aluminium, steel and copper not a lot more worth but assembled into brushless motors makes a big difference. You can go on through the stock. Difficult for HMRC to produce an audit trail as the whole retail transaction, in its entirety, is conducted abroad and I would guess that the companies concerned do not import under their own name but use numerous intermediary companies. One or two containers sparodically through the year get lost in the 10's,100's of thousands. My son from my first marriage used to work at Felixstowe for HMRC in the late 80's and they only did spot checks on containers. Very very occasionally they would strike lucky and open a container listed as containing low value common items like plastic bottles etc to find it full of high end fake trainers etc. The country ressembles a sieve. As an aside, dont get me started on when I had a share in a plane flying out of a farm strip in Suffolk. Example, one of my flights to Holland:- took off from the strip, no checks. Filed flight plan by radio whilst still in UK but on my way. Landed at a small airfield in Holland, no checks. Return was just the same. Take anyone or anything in or out of the country with no problem!

[Erfolg]

My argument is, if I manufacture a product, I have added the value, by both assembly , developing the product, design etc. It is not unreasonable to hope to make a good profit.

Why is it that the UK wholesale and distribution chain expect to make the Lions share of the difference between the raw materials cost and sale value.

All that is happening is that some producers are arranging their sales chain to ensure that profit is generated where it is financially advantageous. Which is no different to what many UK producers have attempted to do when selling outside of the UK.

The world does not owe the UK the max profit at the point of sale. Perhaps the answer is for the UK to manufacture at a price that is low enough that we can retain the added value in the UK. The problem really seems to be an inefficient sales chain, that all believe they are entitled to a good profit and then moans that others are more efficient, saying it is not fair.

[Frank Skilbeck]

Erfolg, nobody is arguing that the Far East companies are not entitled to make a profit, but what they have set up in some instances is a system whereby the goods are sent from a UK warehouse but the sale takes place outside the UK so no UK VAT is paid on the sale. Which not only means that tax isn't collected but any UK business is at a 20% penalty straight away, it's not just the model trade but it's happening in other goods as well.

My example was to show that the value of the goods could be quite low and the selling price quite high and the difference in VAT, remember the selling price also has to cover companies overhead costs and other things. The more companies that use this overseas point of selling the less tax the government collects and what the government wants is for VAT to be paid on the selling price of goods sold in the UK market, after all if you bought a £100 of modeling goods from America or the Far East you'd probably be stung for the VAT.

[Erfolg]

What you seem to be describing would be illegal,in that an item is dispatched from a UK depot without tax being paid or that the purchaser would be liable for Vat,

[kevin b]

Just to clarify things a little Frank.

All goods entering this country (from outside the EU) have to go through UK customs and duty (VAT) has to be paid before those goods are released (been there, done that). That duty is payable on the net value of the goods plus the costs of shipping and insurance. So instead of the manufacturer selling to an importer and charging them a mark up, the goods come through at cost and the manufacturer then sells within this country so there is no tax to pay on the profit from these goods as the financial transaction takes place over the internet. No paper trail in the UK. The Excise still get something, but not as much as from UK based businesses.

Maybe we should go back to doing business like we did in the 1960's-70's.

Has anybody noticed how relatively inexpensive our hobby has become over the last few years ?

[Frank Skilbeck]

Posted by Erfolg on 18/03/2016 22:03:06:

What you seem to be describing would be illegal,in that an item is dispatched from a UK depot without tax being paid or that the purchaser would be liable for Vat,

The budget item was titled

"Tackling VAT evasion by overseas sellers"

[GONZO]

kevin b, the hobby is not just relatively inexpensive I'd go so far as to say its dirt cheap! I've posted this table before. Its from the book 'RC Big Four' published in 1962. Down load here **LINK**

Since then income tax has gone down from 33% to 20% of taxable income and wages have gone up at least 40 times. So, if you multiply the costs quoted you will see just how cheap things are now. Also, remember that the radio gear was just single channel with rubber powered escapements and the engines were generally small'ish diesels or glows with no ball races in the majority of cases.

An example: Super 60 kit £5 7s or £5.35. Times this by 40 as a minimum and you get £214 for a 60" wingspan trainer. Add to this the cost of covering, glue etc and when finished you probably would have spent close on £350 in todays money. Then you could go and sell your soul to the devil in order to buy the radio gear!