Tax: HMRC tackling online VAT fraud

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Donald-Drysdale By Donald Drysdale for ICAS

27 October 2017

In a report published by the Public Accounts Committee, Donald Drysdale finds serious concerns about HMRC’s ability to tackle online VAT fraud.

Unfair competition

Of all UK retail sales, 2% were online in 2006 and 14.5% by 2016.  Over 50% of these were non-store sales, mainly through online marketplaces.  The range of online selling platforms continues to grow and diversify, with sellers using multiple channels.  Amazon and eBay are well-known online marketplaces but there are many others.

Overseas businesses selling goods online to UK consumers do not always comply with Britain’s VAT laws.  In March 2016, David Gauke MP, then Chief Secretary to the Treasury, wrote: “These overseas traders are unfairly under-cutting all businesses trading in the UK, abusing the trust of UK consumers and depriving the government of significant revenue.”

Some UK businesses battling against this unfair competition may have taken heart from a Budget 2016 announcement of new measures to persuade such overseas businesses to register and pay VAT either directly or through a VAT representative, and imposing joint and several liability on online marketplaces in high risk cases.

If recent findings by the House of Commons Public Accounts Committee (PAC) are accepted, the hopes of those hard-pressed UK businesses may have been misplaced.

Tackling online VAT fraud

The PAC’s report on tackling online VAT fraud and error explains that all non-EU traders selling goods to UK customers must charge VAT if the goods are already in the UK at the point of sale.  Some are not doing so. HMRC have estimated lost tax revenues from online VAT fraud and error at £1 billion to £1.5 billion in 2015/16 alone – representing about one-third of all sales on online platforms.

This estimate is described as subject to a high level of uncertainty by the PAC, the National Audit Office (NAO) in an April 2017 report, and the Office of Budget Responsibility (OBR).  The PAC had raised concerns in previous years, highlighting how slow HMRC had been to respond to the growing risk of online VAT fraud.

PAC conclusions

HMRC’s estimate of online VAT fraud is out of date and flawed.  It fails to recognise wider impacts such as distorting fair competition in the market and undermining fairness in the tax system.  While online sales continue to increase, legitimate businesses are struggling to compete with fraudulent sellers who enjoy a 20% price advantage.

HMRC have been slow to tackle online VAT fraud, and have been too cautious in using their powers.  They have not yet ‘named and shamed’ non-compliant traders nor prosecuted a single seller for committing online VAT fraud.

Amazon and eBay gave the PAC assurances about their proactivity in tackling rogue traders using their platforms, but two online retailers’ organisations – Retailers Against VAT Abuse Schemes (RAVAS) and – took issue with some of these assertions.  The PAC concluded that online marketplaces could have made further checks to assess sellers’ VAT compliance, and expressed bewilderment that they had taken such little action to date – while noting that they continue to profit from fraudulent activities on their sites.

It was unclear to the PAC how HMRC would assess the effectiveness of their new powers in reducing online VAT fraud or whether they would clawback VAT unpaid in previous years from newly-registered traders.  HMRC reported an increase of 16,800 in new registrations since the new measures came into force in September 2016, and forecast that they would collect £50 million more VAT from them in 2017.  However, this is a small proportion of the total loss, even using HMRC’s estimate.

HMRC do not know enough about the causes of online VAT fraud and error, such as the extent to which it is deliberate or unintentional.  RAVAS told the PAC that sellers were sceptical that online marketplaces would ever be held liable for any VAT evaded by sellers on their platforms under the new measures.

Exporters to the UK often store goods in UK ‘fulfilment houses’ (i.e. warehouses) before selling them to UK customers through online marketplaces.  Some marketplaces, such as Amazon, also own and operate their own fulfilment houses.  HMRC do not know how many fulfilment houses there are in the UK, making it hard for them to target the most blatant route for online VAT evasion.  The Fulfilment House Due Diligence Scheme in the current Finance Bill will require fulfilment houses to register with HMRC from April 2018, but the PAC was unclear how HMRC plan to enforce this requirement.

The PAC expressed particular concerns about HMRC’s ability to deal with new challenges posed by Brexit, and uncertainty about its effect on online VAT fraud.  EU-based sellers may soon have to operate under the UK VAT laws that currently apply to non-EU sellers, and might therefore find opportunities to evade VAT in the same way.  Even before Brexit, doubts have been raised about UK border controls, and border control weaknesses would remain a key factor in online VAT fraud.

PAC recommendations

The PAC recommends that, by March 2018, HMRC should update their estimate of online VAT fraud, incorporating new evidence and assessments of new risks where applicable, and wider impacts on the economy such as job losses when a business is struggling.

It also recommends that HMRC make better use of their existing powers, especially joint and several liability; speed up the introduction of new measures, such as a split payment method of collecting VAT; and explore new possibilities such as requiring marketplaces to withhold VAT and pass it directly to HMRC.

The PAC advocates closer co-operation between HMRC and online marketplaces, including a requirement that a marketplace must hold a valid UK VAT number for each non-EU trader selling goods to UK customers where those goods are already in the UK.

HMRC should assess the effectiveness of its response to online VAT fraud and report back to the PAC by March 2018, setting targets for reducing the VAT lost through non-compliant online sales, and quantifying how much has been collected from newly-registered traders – including unpaid VAT from previous years.

The PAC suggests that overseas sellers registering for VAT should be required to specify which fulfilment houses they work with.  Furthermore, HMRC should assess the scale of the fulfilment house industry and how the new registration requirement could be made to work efficiently and effectively.

The PAC will regularly monitor HMRC’s progress in preparing for Brexit, and expects HMRC to be in a position to provide future updates.  HMRC expressed confidence in their ability to identify new emerging risks arising from Brexit, but the PAC is concerned by the limitations of HMRC’s current resources and skill set.

And finally…

The PAC concluded that online marketplaces have not been taking the issue seriously and HMRC needs to be tougher on them.

To quote Meg Hillier MP, Chair of the PAC: “With Brexit looming, British business needs more support to make sure we maintain our competitiveness. None of us wants to see the UK as a soft touch.  This is a really important issue for individual businesses and for taxpayers in general.”

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