Low value import thresholds distort markets

An expert’s report from the European Commission concludes low value import exemption thresholds cause major competitive distortions, including loss of VAT revenues, business closures, business relocations and booming new fulfilment industries.

You can find the EY report here: http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/lvcr-study.pdf?bcsi_scan_01d939382f6c0b14=0&bcsi_scan_filename=lvcr-study.pdf

There’s a more digestible executive summary here: http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/execsummary_lvcr-study.pdf

The authors were asked to examine the impact of VAT exemptions for low value consignments. This came of the back of a 2014 recommendation from an EU Commission Expert Group to abolish the exemptions for low value imports which have been in place across the EU since 1983.

Low value VAT import thresholds exist because of the costs of collecting VAT on large volumes of small imports. The report was unable to determine the costs for tax authorities in assessing and collecting VAT because of a lack of publicly available information. However, data was available from freight companies which indicated the cost to them of processing a clearance for a small consignment triples when VAT and duty apply. This is because of the additional paperwork and information that has to be provided.

The UK has managed to devise a methodology which keeps the compliance costs below the EU average. Overseas traders can use a prepayment scheme where they charge VAT on mail order goods and pay it up front to the customs authority. This makes the clearance process much simpler when the goods arrive but transfers compliance costs to the supplier.

According to the report the growth of low value import consignments is accelerating. Conservatively they estimate between 1999 and 2013 volumes tripled, outpacing GDP growth in the same period. These imports are now costing EU governments anything between Euros 500m to 900m annually.

The challenge for governments has been balancing the additional revenue against the additional costs of removing the exemptions and the impact of extra compliance on the broader economy.

In my view because of the competitive distortions highlighted in this report it’s only a matter of time before the exemptions for low value imports are removed. A technology solution will be found.

Iain