Splitting hairs about who pays VAT
By Donald Drysdale for ICAS
23 March 2018
Donald Drysdale welcomes proposals for a ‘split payment’ mechanism to compel overseas traders to account correctly for VAT on their online sales to UK consumers.
VAT lost on online sales
As a result of digital advances, UK consumers can now click and buy almost anything from internet sellers based anywhere in the world. And it is no wonder that deliveries are swift and some of the prices seem attractive. In 2015/16 the Exchequer lost some £1 to £1.5 billion in revenue from traders who failed to charge VAT to UK consumers on online sales of goods stored in the UK at the point of sale.
The Government wants to stop such traders from competing unfairly with tax-compliant businesses. It has therefore taken steps to curb their activities – including making online marketplaces jointly and severally liable for unpaid VAT of sellers operating on their platforms.
Just over a year ago HMRC issued a call for evidence seeking views on the feasibility of a further measure designed at collecting VAT at the point of purchase, and in December 2017 they published a summary of responses.
Split payment
The call for evidence focused primarily on how technology within the payments industry might be used to identify and collect VAT on online sales in real time and transfer it directly to HMRC. The concept would involve placing an obligation on an intermediary in the payment process to split the consideration and remit the VAT element direct to HMRC.
This would significantly reduce the difficulties of enforcing online seller compliance, thus reducing the opportunity for non-payment of VAT by overseas traders. In their call for evidence, HMRC set out proposed design principles for a split payment arrangement, asking what challenges the scheme might pose and how these might be overcome.
The majority of responses were positive, acknowledging that there would be challenges but concluding that split payment is technologically possible. As a result, HMRC have now published a consultation document setting out objectives, identifying options and looking in greater detail at how a split payment mechanism could work.
How split payment might work
An online payment involves a number of different parties – typically the purchaser’s bank, a merchant acquirer, a payment service provider (PSP), a card scheme and the supplier’s bank.
Let me clarify these terms. A merchant acquirer normally provides the retailer with a range of services covering all card-related matters – e.g. authorisations, payments, claims, returns and refunds. On the other hand, a PSP provides various services relating to the mechanism for electronic payments and integrates different payment methods such as e.g. credit and debit cards, bank payment, e-banking and e-wallets. Sometimes both roles are performed by a single organisation.
HMRC ask which party would be best placed to perform the split of VAT from the gross payment, bearing in mind that they would have to be in the UK or otherwise within the scope of a compliance mechanism. They would have to hold enough details of the transaction and be able to identify that the supplier is overseas and the customer is in the UK. HMRC regard the merchant acquirer as best placed to assess the VAT treatment of the transaction and therefore see them as likely to be the best party to effect the split.
HMRC also believe the card schemes could play a role in ensuring merchant acquirers adhere to their split payment obligations. The card issuer will generally be UK-based, so HMRC could require them to effect the split in cases when it cannot be known for certain if the merchant acquirers or PSPs will do so.
Split payment could involve three distinct stages. In the ‘setup’ stage, HMRC would create and maintain a list of fit and proper merchant acquirers and PSPs that are known or trusted to comply with the rules; acquirers or PSPs whose clients intend to do business in the UK could apply for inclusion, and the register could be available for reference by all UK banks and card issuers.
In the ‘transaction stage’, on receiving a payment authorisation request the card issuer would check whether the merchant acquirer or PSP was on the register. If not, the card issuer would retain an estimate of the VAT element of the payment and remit it to HMRC, very possibly as an automated process. Otherwise, the card issuer could release the full amount of the transaction, and the merchant acquirer or PSP would split the appropriate amount of VAT and remit this to HMRC, potentially on a daily basis in line with usual settlement periods.
When an online marketplace is involved, it is more closely associated with the transaction and may hold sufficient information to identify the actual VAT liability of the goods. HMRC want to explore whether online marketplaces should effect the split for transactions that go through their platforms. If so, card issuers and merchant acquirers would need to know which transactions are taking place via an online marketplace and which are not.
The split of VAT could be calculated at the standard rate for simplicity, or at a pre-determined rate arrived at under the Flat Rate Scheme, or at a ‘net effective rate’ specific to each overseas supplier and calculated annually. HMRC believe that the net effective rate would be fair and proportionate while avoiding any need for the party effecting the split to know the actual VAT liability of each transaction.
Finally, in the ‘reconciliation stage’, HMRC would credit the supplier’s VAT account with the amount received from the merchant acquirer, PSP or card issuer. The supplier would be responsible for informing HMRC of any errors.
Your views matter
This new split payment regime will involve some added complexity for honest overseas traders selling to UK consumers. However, it seems to me wholly justified – indeed, long overdue – as a means of countering tax evasion by other offshore suppliers. But do you agree? And given the likelihood that the Government will press ahead with its plan, do you have views on how split payment should be implemented?
HMRC will run a series of collaborative workshops to test emerging views on split payment over the spring and summer, and they invite all those with an interest to get in contact with them to make arrangements.
Article supplied by Taxing Words Ltd
ICAS intends to respond to the consultation and invites members, affiliates and students to share their views, preferably by 8 June 2018