The National Audit Office has today published the findings from its investigation into the concern that online sellers based outside the European Union (EU) are not charging Value Added Tax (VAT) on their goods located in the UK when sold to UK customers. Online sales accounted for 14.5% of all UK retail sales in 2016, just over half of these were non-store sales, mainly through online marketplaces, where buyers and sellers can meet and transact.
VAT rules require that all traders based outside the EU selling goods online to customers in the UK should charge VAT, if their goods are already in the UK at the point of sale. In these cases, sellers should pay import VAT and customs duties when the goods are imported, based on their value, and charge their customers VAT on the final sale price. The sellers should also be registered with HM Revenue & Customs (HMRC), and are required to submit regular VAT returns. The sellers must account to HMRC for the VAT charged to customers, reclaiming any eligible import VAT through their VAT return.
The key findings of the investigation are as follows:
- HMRC estimates that online VAT fraud and error cost between £1 billion and £1.5 billion in lost tax revenue in 2015-16 but this estimate is subject to a high level of uncertainty. This estimate represents between 8% and 12% of the total VAT tax gap of £12.2 billion in 2015-16. UK trader groups believe the problem is widespread, and that some of the biggest online sellers of particular products, such as mobile phone accessories, are not charging VAT. These estimates exclude wider impacts of this problem such as the distortion of the competitive market landscape.
- HMRC recognised online VAT fraud and error as a priority in 2014, although the potential risk from online trading generally was raised before this. In 2013 the NAO reported that HMRC had not yet produced a comprehensive plan to react to the emerging threat to the VAT system posed by online trading. The report found HMRC had developed tools to identify internet-based traders and launched campaigns to encourage compliance but had shown less urgency in developing its operational response. Trader groups claim that online VAT fraud has been a problem as early as 2009, which has got significantly worse in the past five years. The Chartered Trading Standards Institute shares this view. Based on the emergence of the fulfilment house (a warehouse where goods can be stored before delivery to the customer) model, HMRC recognised online VAT fraud and error as one of its key risks in 2014 and began to increase resources in this area in 2015.
- HMRC’s assessment is that online VAT losses are due to a range of non-compliant behaviours, but has not yet been able to assess how much is due to lack of awareness, error or deliberate fraud. Amazon and eBay consider that lack of awareness of the VAT rules is a major element of the problem. Amazon and eBay have focused on educating overseas sellers and providing tools to assist with VAT reporting and compliance. HMRC’s strategic threat assessment, carried out in 2014, concluded it was highly likely that both organised criminal groups based in the UK and overseas sellers in China were using fulfilment houses to facilitate the transit of undervalued or misclassified goods, or both, from China to the UK for sale online.
- HMRC seeks to detect and correct online VAT non-compliance by using intelligence to identify suspected fraudulent traders. UK trader groups have told us there is more that HMRC and online marketplaces could do with seller data which would identify potentially non-compliant sellers. HMRC has started to collaborate with online marketplaces to gather data; this data exchange is in its early stages and HMRC plans to make it more systematic and extensive.
- HMRC has decided to focus enforcement actions against online VAT fraud inland rather than at the border. HMRC and Border Force, in determining the extent of border checks and the level of resources devoted to them, concluded that inland enforcement actions to tackle online VAT, particularly those targeting fulfilment houses and leveraging the online marketplaces through the new measures, are more effective and efficient compared to enforcement activity at the border. This included consideration of the balance between the UK’s objectives of facilitating trade and tackling evasion. HMRC typically focuses on fulfilment houses rather than asking Border Force to check individual consignments or packages at the point of import. HMRC cannot be certain how many fulfilment houses there are in the UK and, in 2017, estimated the number at between 500 and 3,000.
- To date, there have been no prosecutions for online VAT fraud but HMRC has carried out many civil operations against suspected evaders. These civil operations include 279 investigations of businesses and 373 compliance interventions in 2016-17. HMRC considers criminal prosecutions are not the appropriate response to this type of fraud. There are particular difficulties in prosecuting suspected online VAT fraud which make this route lengthy, costly and with an uncertain outcome. In 2016 HMRC gained new legal powers to tackle online VAT fraud and error, which have the benefit of applying to all non-compliant behaviours, with no requirement to prove intent.
- HMRC introduced new legal powers to tackle online VAT fraud and error in September 2016. The new joint and several liability power gives HMRC a new way to tackle suspected non-compliance, and is the first time any country has introduced such a power for this purpose. The new powers include making online marketplaces potentially jointly and severally liable for non-payment of VAT when HMRC has informed them of an issue with a seller, and they do not subsequently take appropriate action. Since September 2016, HMRC has been testing the powers on 200 high-risk sellers, and has issued 27 pre-notifications and 37 full notices as at March 2017. HMRC considers that this will have a wide deterrent effect, and plans to increase the scale of its activities significantly from April 2017.
- HMRC has seen an increase in the number of new VAT registrations from non-EU sellers since the legislative changes were announced and came into force. HMRC is not aware of the proportion of these sellers that had been trading in the past and not charging VAT, or whether they will be compliant in the future. However, HMRC will have greater visibility of those businesses that are registered. HMRC will risk-assess the newly VAT registered businesses and undertake compliance activity, including using the joint and several liability measures. In addition, from April 2018, fulfilment houses will need to register with HMRC and carry out due diligence on their overseas customers. HMRC has estimated that the new powers could generate additional revenue of around £875 million between 2016 and 2021, and will cost £24 million in 2017-18.
19 April 2017