The Public Accounts Committee has attacked the “unfair and illegal” tax practices of overseas competitors using online trading platforms.
Many sellers based outside the EU aren’t applying VAT to sales on goods sold through marketplaces like eBay and Amazon. This enables them to undercut by UK businesses by up to 20%. It’s a racket which HMRC estimates costs the public purse between £1 and £1.5bn and many consumers are unaware that it’s happening.
It’s an estimate that the PAC has labelled as “out of date and flawed” since HMRC does not have estimates of the amounts lost before 2015–16. The estimate, the PAC report said, also doesn’t “account for the wider effects of online VAT fraud, such as distorting fair competition in the market and undermining perceptions of equity and fairness in the tax system”.
The Committee says HMRC should, by March next year, produce an updated estimate of the scale and impact of the VAT fraud tax gap.
Cat and mouse
Meg Hillier MP, the chair of the PAC, chastised HMRC’s inertia in dealing with the issue as “dismal”. But also admitted the tax authority is playing a game of cat and mouse since the companies are based outside the UK. It’s for this reason that the PAC recommended “high profile enforcement action” to send a message.
“The common link is that physical goods are sold via online marketplaces, in many cases via warehouses or ‘fulfilment centres’ physically based in the UK. HMRC needs to be tougher on these marketplaces.”
Hillier’s most stern criticism was reserved for the online marketplaces themselves, however. “Online marketplaces tell us they are committed to removing 'bad actors' yet that sentiment rings hollow when those same marketplaces continue to profit from the actions of rogue traders.
“They can and should do more to drive them out and we will expect online marketplaces to cooperate fully with HMRC in tackling non-compliance.” Amazon and eBay came in for particularly harsh censure from MPs.
Alongside the revised estimate for the VAT tax gap, the Committee said it wants HMRC and online marketplaces to reach a cooperation agreement by next March.
"This should include a requirement for all online marketplaces to ensure that a valid VAT number is showing for any non-EU trader selling goods to customers in the UK, where those goods are already in the UK. In the absence of a legal requirement to do so, we would expect online marketplaces to implement this measure voluntarily."
HMRC, however, believes its new, enhanced powers—joint and several liability, the Fulfilment House Due Diligence Scheme and the split payments method of collecting VAT—will be sufficient to tackle the problem.
For the PAC, these powers will not yield instant results, “and there is no guarantee that this will be enough”.
The spectre of Brexit
As with seemingly everything these days, the sudden urgency of the issue has everything to do with Brexit
As VATfraud.org, a campaign lobby dedicated to this issue, pointed out, once the UK exits the EU, “every country in the world, including the EU, will be able to distant sell into the UK with the customer paying the VAT & Duty”.
The problem of VAT avoidance, according to VATfraud, could go nuclear post-Brexit. “The postman will become the VAT collector for every distant sold package sold into the UK. Prices for all non-UK sellers with stock located outside the UK on Amazon.co.uk will be displayed without VAT at 20% cheaper” and “all goods under £15 from non-UK retailers will be sold VAT free and have a 20% price advantage”.
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.