This article looks at the popular payment methods used in the UK eCommerce market and outlines the relevant taxation requirements for trading in this territory.
Banking in the UK is regulated by the Bank of England, and London is recognised as a world-leading financial centre. This is due in part to the fact that nearly all the world’s banks have branches or subsidiaries in London.
When trading in a different territory, it’s important to ensure that your customers are able to pay using the method they would with a local retailer or supplier. 63% of online transactions in the UK are conducted via payment card. UK online shoppers prefer to pay by credit card (21%) or debit card (79%), whilst 21% use PayPal, and 11% pay by an alternative method.
The use of credit cards provides UK consumers with protection under the Consumer Credit Act where purchases over £100 are insured by the card issuer. Debit card payments aren’t protected in this way but many issuing banks offer services that help consumers where online purchases go wrong. For cross-border payments, the availability of card payments provides consumers with a degree of confidence.
Interestingly, a recent WorldPay report suggested that by 2019, card payments would only make up 50% of all online transactions whilst alternatives gain prominence and exceed 50%. These alternatives include eWallets,bank-to-bank transfers and pre-pay systems.
Also worthy of note is the introduction of the Payment Services Directive 2 (PSD2). Whilst the scope of the EU directive is wide-ranging, there are a couple of points of note for international retailers. This directive comes into force in the UK during January 2018. Surcharging based on the use of any payment type will be banned. Another area of interest is the requirements for strong customer authentication. This will take the format of multiple levels of authentication; perhaps based on two devices. Businesses and consumers are protected by a liability shift if the transaction proves fraudulent. An area to watch however is decline rates from card issuers. As they will be taken the majority of the risk and liability for fraud, they are more likely to require increased levels of authentication in order for transactions to be processed. The possible impact on merchants is currently unknown but worth watching.
Note: The following guide is a representation of the current status of taxation policy in the UK at the time of publication. It is provided purely as a guide and professional accounting advice should be sought before entering the UK market
Brexit: In June 2016, the UK Government held a referendum on the countries membership of the European Union. The result of the referendum is that the UK will be exiting the EU. At the end of March 2017, the Government offi cially triggered the leaving process meaning that the 2-year negotiation period has commenced. How the trading relationship between the EU and UK will evolve is still unclear. In the meantime, businesses trading into, or out of the UK will continue to be bound by the existing taxation regulations. Elements may be reviewed as part of the now annual budget process but the relationship between the UK, its EU business partners and customers remains the same. For example, VAT thresholds, customs duties and registration requirements.
In March 2019, if there isn’t a trade deal in place then World Trade Organisation (WTO) rules will apply. If you are an EU based business looking to trade with UK customers then there may be additional tariffs and taxes due on sales and imports. It is more than likely however that some form of agreement will be in place, potentially with some level of tariff although a customs union is a likely outcome. For the next 2 years, or until further notice, the existing rules remain in place.
TAX, VAT & CUSTOMS DUTIES
For companies engaged in eCommerce in the UK, taxes divide into three parts:
The following table depicts annual rates of tax for the financial year 2015. It should be noted that these are subject to change, and it is recommended that you seek advice on any rates or tariffs that might apply to you and your business.
* Entrepreneurs’ Relief is available for individuals who make a material disposal of a business asset; namely:
There is only one major tax on a company’s profits, which is currently levied at a maximum rate of 20% (from 1 April 2016). Rules are fixed in advance and announced in the Budget each year. Within three months of commencing trade or becoming active, a UK company or establishment is required to notify HMRC that it falls within the charge to UK corporation tax. Failure to notify can result in a penalty.
A company (including the subsidiary of an overseas company) that is resident in the UK for tax purposes is liable to pay corporation tax on its UK profits and chargeable gains. Those foreign companies with UK establishments will be liable to this tax on chargeable gains arising on the disposal of any assets that are situated in the UK and used for the purposes of the UK establishment or its trade. Particular rules and exemptions apply to this, and professional advice should be sought.
A company will be considered ‘resident’ if the organisation’s central management and control takes place within UK borders.
UK permanent establishments of non-UK resident companies are liable to UK corporation tax generally on:
Corporation tax is assessed on total taxable profits (after certain statutory tax adjustments) and chargeable gains in respect of each accounting period. The rate of corporation tax is set for the financial year ending on 31 March. If the rate is changed, the profits of an accounting period that straddles the date of change are apportioned and charged at the appropriate rates.
Relief for trading losses
Trading losses may be utilised in four principal ways by UK resident companies:
Taxation of foreign branches
Broadly, UK companies are subject to UK corporation tax on the profits of their foreign branches (with credit for overseas tax paid). A UK company may elect for exemption from UK tax on the results of overseas branches. The exemption will apply from the first accounting period starting aft er the election is made. The election cannot be revoked once that first accounting period has commenced.
Corporation tax administration
Companies have to `self-assess’ their tax position in a similar way to individuals. The times at which corporation tax is payable depend on the size of the company or group paying the tax.
Companies should inform HMRC of their annual Corporate Tax liability and pay it nine months after the fi nancial year end.
If goods are imported into the UK from outside the EU, various import duties may become due based on factors such as the tariff classifi cation, customs value and the origin of the goods.
VAT will become due upon importation from non-EU countries and certain EU ‘special territories’ when these goods are to be declared for use within the UK. As a general rule, the UK follows EU customs procedures.
The UK Customs/VAT Warehousing Procedure allows the storage of goods without such goods being subject to import duties – in such cases, neither VAT nor customs duties are due.
The UK VAT regime is based on the EU VAT Directive, which the UK is required to adopt as a member of the European Union. Like all EU countries, the UK is broadly free to set its own VAT rates within certain criteria. The UK has three VAT rates: 20% standard rate levied on most goods and services; 5% due on limited number of goods; and 0% due on books, foodstuffs and other essentials. Some services are exempt from UK VAT, including financial services.
There remain, however, some significant and confusing differences of detail between different member states of the EU.
VAT is essentially a tax on consumer expenditure that must be charged by a taxable entity in the course of furtherance of a business. This tax is levied on most goods and services provided by registered businesses in the UK, and most goods imported into the UK from outside the EU. A UK taxable entity is anyone registered or liable to be registered for UK VAT. All VAT registered businesses are obliged to charge VAT on the full sale price of the goods or services that they provide, unless exempt or otherwise deemed outside the scope of VAT. In theory, the final burden of the tax should not fall on business activity. This objective is achieved by an arrangement known as the input/output system. When a business buys goods or services, it pays VAT to the supplier (input tax).
When the business sells goods or services, whether to another business or to a final consumer, it is required to charge VAT (output tax) unless the supplies are specifically relieved from the VAT charge.
If the business makes only taxable supplies, it must total the input tax it incurs and deduct this from the output tax charged, reporting and paying the balance to HMRC on a calendar quarterly basis. The result of this is that the final consumers bear the cost of VAT on the final price of the goods or services they purchase.
When to VAT register
If you are a UK resident business that supplies taxable goods and services in the UK and your annual taxable turnover exceeds the stated threshold - £83,000 from 1 April 2016 – you must register for VAT. This fairly high VAT turnover registration limit means that a large number of small turnover businesses are not within the VAT system, though smaller businesses can also voluntarily register for the tax.
A taxable person is liable to register for VAT if the combined value of their taxable supplies in the UK exceeded the registration limit in the preceding 12 months, or there are reasonable grounds for believing that the value of taxable supplies to be made in the next 30 days alone will exceed the registration limit.
A business may also de-register if the anticipated value of the taxable supplies in the next 12 months is less than the de-registration limit (currently £82,000).
Taxable persons from other EU countries selling goods via eCommerce face different rules. If they hold the stocks in the UK, at a rented warehouse space, then they must register their foreign company for UK VAT immediately. They will have to do this to report the movement of the goods from their home state into the UK.
If EU foreign companies are holding the stocks in their home state prior to receiving a UK order, then they are not immediately required to UK VAT register. Instead, they are allowed to charge the VAT rate of their home country. However, once they exceed the UK’s threshold for eCommerce sales, known as the distance selling threshold, of GBP 70,000 per annum, they will have to UK VAT register. They then charge UK VAT on their sales to UK consumers and file quarterly UK returns.
It is highly likely that a company seeking to set up in the UK will wish to register for VAT or be required to do so. The registration process requires the non-resident company to complete a registration form verifying the basis under which it will become a taxable person, provide statistical information, etc. The registration should be processed in three weeks. However, during busy periods HMRC can take up to 12 weeks.
There are other returns that will need to be rendered if a UK based business trades with customers / suppliers located outside the UK.
This article provides a payments overview of the UK eCommerce market – we have produced a full country guide covering in-depth information on multiple aspects of trading into this territory including logistics, payments, legal framework and marketing.
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