Press Release - HM Revenue and Customs: VAT on e-commerce
26 May 2006
The National Audit Office has today backed HM Revenue and
Customs’ assessment that the overall risk to VAT revenue from
on-line shopping, or e-commerce, is currently low. The Department
has been alert to specific areas of risk which have emerged and is
well-positioned to tackle these. As activity increases in this fast
changing environment, it will be important that the Department
keeps abreast of possible changes in the patterns and levels of
risk to VAT.
Last year around 22 million Britons shopped online buying
everything from CDs to electrical goods, food and holidays. Sales
over the internet trebled to £18.1 billion in the period 2002 to
2004 with a further surge around Christmas 2005. Around 2 per cent
of sales were for digitised products such as computer software and
music which customers downloaded instantaneously. The Department
collected over £1 billion in VAT in 2005-06 on e-commerce goods and
services. The proportion of VAT collected by the Department from
e-commerce transactions is likely to grow substantially with sales
expected to hit nearly £60 billion a year by April 2010.
The internet has led to increased sales of goods by businesses
outside of the EU to customers in the EU. Around 45 million
commercial packages are imported by post into the UK each year from
countries outside of the EU including the Channel Islands. European
Community legislation allows Member States to exempt from import
VAT commercial consignments valued below £18. In the 2006 Budget,
the Government announced that it is keeping under close review the
way in which some UK businesses have restructured their activities
to take advantage of the relief that applies to commercial
consignments imported from outside the EU and will consider options
for changing the relief if it continues.
Some overseas suppliers incorrectly describe or value the
content of commercial packages to evade VAT. While the scale of the
problem is difficult to quantify, controls at the border provide a
safeguard. The Department should increase publicity campaigns on
the internet and through other media to inform UK customers of
their liability for tax due. The Department is increasingly working
in partnership with overseas organisations to operate checks at the
point of dispatch on goods which are liable for import VAT. This is
a more cost effective way of ensuring the payment of import
VAT.
The main risk of businesses failing to register and pay VAT on
e-commerce lies with businesses trading solely on the internet and
people who trade on e-marketplaces such as eBay. The Department is
taking some innovative steps such as developing an advanced search
engine, called Web Robot, which helps to identify online businesses
which should register for VAT, but have not. This should assist the
Department in carrying out more extensive and cost effective
checks.
The nature of e-services means that business do not need to be
located close to their markets. This has brought an increase in UK
customers buying e-services from businesses outside the UK. There
are currently different VAT rules depending on whether services are
provided to UK customers from the UK, from elsewhere in the EU or
from outside the EU. The UK has been working with the European
Commission and other Member States to tackle the distortion to
competition caused by VAT rules for services bought online.
Temporary changes in EU legislation in July 2003 removed some of
this distortion by making e-services provided to EU customers by
businesses outside of the EU subject to VAT. EU Member States,
however, have no legal status to enforce their tax regimes in
non-EU countries. The Department has nevertheless between July 2003
and December 2005 collected £59 million more in VAT from non-EU
businesses selling e-services to UK customers, but should explore
further ways of establishing the extent to which all relevant
businesses are complying.
A further concern has been the risk of EU businesses relocating
to certain other EU Member States to benefit from lower VAT rates
on their sales of e-services to EU customers. Some UK businesses
have relocated to Luxembourg or Madeira, where VAT is charged at 15
per cent compared to the 17.5 per cent they were paying. Currently,
EU businesses selling e-services to EU customers are required to
pay VAT in the Member State where they are located, regardless of
where the customer lives. In July 2005 the European Commission
issued a proposal which would mean that all businesses would charge
VAT on e-services at the rate in the country where the customer
lives. If these changes are adopted, the Department will need to
ensure that the systems introduced are effective in collecting VAT
and easy to use.
Sir John Bourn, head of the NAO, today
said:
"I find it encouraging that HM Revenue and Customs is
well positioned to manage the current risks to VAT from electronic
commerce. With internet sales set to mushroom in the next few
years, the Department faces a challenge to ensure it stays ahead of
the game. Some businesses are inventive at side-stepping VAT, and
the Department must be equally innovative in guaranteeing the
Exchequer gets the revenue it is due."
Notes for Editors
- HM Revenue and Customs does not separately identify the exact
amount of VAT collected from e-commerce because businesses are
required to calculate and pay over VAT for their entire taxable
activities, which include both traditional forms of business and
e-commerce.
- Press notices and reports are available from the date of
publication on the NAO website, which is at www.nao.org.uk. Hard
copies can be obtained from The Stationery Office on 0845 702
3474.
- The Comptroller and Auditor General, Sir John Bourn, is the
head of the National Audit Office which employs some 800 staff. He
and the NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 40/06
All enquiries to Mark Anderson, NAO Press Office: Tel: 020 7798
7558
Mobile: 07796 937 119