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.