Why VAT has become a surprise cost for retailers and consumers post-Brexit

Despite tariff-free trade deal, customs duty applies if product does not originate in country from which it is sold

Consumers have complained of surprise tax demands after buying items online such as Fortnum hampers post Brexit. 

VAT and customs tariffs have become key issues in the post-Brexit trading landscape after consumers buying online from the UK and Europe were hit with unexpected bills.

Residents in the UK and the continent have complained of surprise tax demands and customs charges after online purchases, while some retailers suspended shipments to avoid the red tape.

Andrew Goodacre, chief executive of the British Independent Retailers Association (Bira), said the issue centres on the rule of origin of products.

Despite the tariff-free, EU-trade deal agreed on December 24, customs duty still applies to any goods ordered from the UK that do not originate in the country.

“Purely UK-made items would be tariff-free, but if there are products in that item ups that come from outside the EU and the outside the UK, then it may well incur a tariff,” Mr Goodacre said.

One Bira member who has cashmere sweaters produced in the UK and then exported to Europe, realised that because the original material comes from Mongolia, they were subject to a levy.

“So that would incur a tariff of 12 per cent because it’s not seen as part of the rules of origin because the main constituent parts of that sweater is outside the rules,” Mr Goodacre said.

The reverse also applies to retailers importing goods from the EU, with one clothing retailer telling Mr Goodacre a trouser line she normally imports from Romania has become more expensive to run because the cotton originates in the US.

“This means they don't actually originate from the EU any more under the new agreement so there's duty on those goods,” he said.

On January 1, the UK changed the rules for foreign mail-order sellers, requiring them to collect the sales tax on behalf of the government and in turn pay the money to HM Revenue & Customs.

The Institute of Chartered Accountants in England and Wales said any new issues arising post-Brexit are due to the point origin, with the net VAT position for most businesses and consumers no different than before the UK exited the EU.

“Although the free-trade deal knocks out most tariffs, if you can't qualify then that gives you incremental customs duties to pay," said John Boulton, technical policy director at the ICAEW.

“The proportion of goods affected may only be very small but for some businesses this could crop up.”

This could potentially increase prices for British and EU consumers on some goods, which would ultimately make retail less competitive at a time when the sector has already been hammered by the effects of Covid-19.

Footfall in the UK retail sector fell 43.4 per cent in 2020 compared to the previous year, according Friday’s data from the British Retail Consortium, with the number shoppers visiting high streets dropping 49.5 per cent after a cycle of lockdowns closed non-essential stores.

Mr Goodacre said there will be some kind of resolution to the post-Brexit charges because the issue will apply to large retailers as well as independent shops.

“This will also apply to Primark, Marks & Spencer and Asos – any retailer that imports clothes, which would have been duty-free in 2020 but are now caught by these rules," he said.

Some leading shops in the UK have suspended shipments to the continent, with department chain John Lewis greeting European customers with a webpage saying it is no longer taking international orders.

Meanwhile, luxury food store Fortnum & Mason told customers it will no longer “send any products to European countries at this current time, due to Brexit restrictions”.

In the EU, some smaller businesses have given up selling their products to the UK because of complicated changes to the cross-border VAT regulations.