The As-Is Situation - UK consumers always pay VAT on eCommerce sales.

Cross-border EU sales
On cross-border B2C sales, VAT is charged, so you buy an item from website merchant in Germany, you are charged 20% UK VAT on that item and the German merchant remits the VAT to HMRC as part the EU's integrated VAT system. 

Cross-border RoW sales
If you buy some golf clubs, from say the USA, no VAT is charged by the merchant. The merchant attaches a customs declaration to the goods declaring their contents and value. When the item comes into the country your courier, as a HMRC agent, will inform you how much VAT at 20% needs to be paid, once paid your item is delivered. Tariffs may also apply but lets ignore them for now.

If you ever ordered some headphones from Vietnam on eBay you may have noticed that HMRC don't collect VAT on imported items of value less than £15. So buying from Vietnam can save £3 on a £15 sale, but given the 10-15 day delivery time, that is not going to create a major impact on UK retail sales. Its probably not even economical to collect such low amounts anyway.

So as an UK consumer, HMRC is happy for you purchase your items from anywhere in the world and through either of these systems, you will have to pay VAT at 20% on your purchase. 

You have the choice, but this ensures retailers in the UK are not disadvantaged by you shopping cross-border and avoiding VAT.

The To-Be situation 
BREXIT, in my opinion, brings together a perfect storm of geography and VAT changes which will leave a wide open gap to be exploited on eCommerce sales.

For a number of reasons I won't go into here, this does not cover B2B sales

To be clear ALL BREXIT models mean that the UK will exit the EU VAT system. This is what BREXITeers want so they can charge VAT on fuel and tampons. Also Norway and EEA countries are not part of EU VAT.

This will mean these changes to the As-Is situation:
  • VAT registered merchants in the Republic of Ireland will no longer be required to collect VAT on sales to UK consumers as they are now.
  • The PM and NI Secretary have confirmed that the NI and Republic of Ireland border will be open.
  • There are over 200 unapproved roads on the border, in most cases the border is invisible and only local residents know where it is,so it is impossible to close and check every small delivery van crossing anyway.
  • The UK has never had a land-border with a non-EU non-VAT country before, Ireland and the UK joined the then EEC at the same time.
This could mean UK consumers could buy VAT free from Ireland using this process:
A merchant in the Republic of Ireland takes and order from a UK consumer and does not charge VAT, so the price to the UK Consumer looks 20% cheaper than competitors located in the UK.

This is legal. They may add to their T&C's that the consumer is liable for any VAT, just like merchants in the USA do today.

The merchant hires a delivery company to deliver the item, without knowing how. The delivery company drive the item across the border from the Republic of Ireland to Northern Ireland, the border is open, there are no HMRC officers to collect VAT. 

This is legal, I guess technically the parcels should have a customs declaration on them, but given they are not going through a customs check what is the point?

The delivery company goes to Post Office or FedEx depot in Northern Ireland and forwards the package for onward delivery to England. This is legal.

The item is delivered to the UK consumer who has avoided VAT at 20% on their purchase. This is legal. well technically the consumer is liable for and should probably pay the VAT, but I can't even see a mechanism for them to do this after the event. Even if changed, HMRC would rely on UK consumers self-declaring purchases hardly an effective tax collection system.

Doesn't this happen now?
No because VAT is charged on Cross-border trade between EU countries and the UK and Ireland are EU countries. An Irish merchant not collecting UK VAT would be committing VAT fraud which has serious consequences and given that they are online, thier competitors would see and report them.

This wouldn't happen as it would work both ways. 
That is true, but also remember that the two markets are very different, the UK has 60m people of which 87% buy online, where has Ireland has 4m people of which 63% who buy online. The UK eCommerce market is EUR127,200 million and in Ireland its EUR5,300 million. So the potential damage of lost VAT is far greater for the UK than Ireland and that will always be the case.

Potentially any lost VAT on sales from the UK into Ireland would be more than made up by the new extra income from employee, employer and corporation taxes on profits, on the new sales, because these are being paid in Ireland and these could be significant as you can see from the figures above.

Why Ireland and not other EU countries?
This opportunity is unique to Irish merchants as, when items are sent to/from France or the rest of the EU, to the UK, there is no land border, and therefore there is no opportunity to pass the border without VAT collection, in these cases it would work as per the As-Is Cross-Border RoW sale example above. 

Wouldn't it be up to the Irish Governments to stop this? 
If requested by the UK Government to stop this, I suspect the Irish Government responses would be as follows, after they picked themselves up from rolling on the floor laughing.
  • This is completely created by BREXIT and the UK's unilateral withdrawal from the EU VAT system, so why should Ireland be the one to fix it?
  • As above, nobody is actually doing anything illegal certainly not in the Republic of Ireland anyway what can they do?
  • Why wouldn't Ireland want a big employee and company tax bonus at the expense of UK VAT revenues, when BREXIT caused other economic problems for Ireland? 
  • If the UK wanted "Control" and forgot about VAT collection on its open land border, perhaps they should have planned better, or even you know, at all!
Do businesses want to compete on Tax?
Most retail businesses I know want to compete on price, product, design, customer service or location. They rarely want to compete on tax, however, there are lots of examples where they do, such as booze sales in Calais or you may remember buying DVD's from the Channel Islands without VAT. 

So history proves that if there is an opportunity for money to be made legally, as a result of tax anomaly, then it will be taken advantage of.

My view is that big UK businesses would be reluctant initially to be involved in this. Tesco for example, getting an English customer to buy via Irish website instead of a UK one, doesn't improve the margin on its sale, its just more complicated and probably more expensive in delivery costs.

However, thousands of eBay and Amazon merchants would be more than willing to get the ball rolling. The opportunity for high value items such as power tools or cameras would be very good. So the merchant takes orders all day, then in 4 vans can easily drive £10k or £20k of goods across the border for onward UK delivery costing the UK. If they were ever stopped they could pay the VAT and ask the customer to pay it before forwarding it. If the customer refused they could take the item back and reclaim the VAT.

Entrepreneurs would be quick to exploit such an opportunity and if UK retailers were losing sales they may have to set up operations in Ireland. There is precedence for this, stole so many CD/DVD sales from Tesco UK stores sales, that it set up its own operation in the Channel Islands to exploit the VAT loophole, before it was closed. Tesco / Sainsburys etc all also operate wine warehouses in Calais. Retailer shareholders will ask, if we are losing sales, and its legal, then why aren't we doing the same?

Suddenly lots of warehouses were built in the Channel Islands on the back of this, I can see the same along the Republic of Ireland border side with lots of warehouses of stock awaiting delivery to UK customers. I have got statistics, but I would estimate that warehouse space in North West Ireland (Sligo/Donegal) would have to be the cheapest in Europe, probably with some Government (or even EU!) help available to set up new businesses in these deprived areas. Operating costs would also be very competitive.

Wouldn't UK consumers be loyal?
Internet consumers are used to running price comparisons and any product that is 20% cheaper is going to look very attractive.Next day delivery is still possible.

Although I excluded duties and tariffs, if these were put on the UK post BREXIT then this would make this model more attractive to consumers as they would avoid these as well as VAT. 

So  if you want to invest in Warehousing in NW Ireland, get in touch I would be happy to show you around!