British businesses strangled by online VAT fraud

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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It’s an estimate that the PAC has labelled as “out of date and flawed” since HMRC does not have estimates of the amounts lost before 2015–16.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.

Closer cooperation

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. 

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02nd Nov 2017 11:53

It is good to see that this is making its way to the headlines. Online sellers who are based in the UK have to swallow the %20 VAT tax out of their profit once they go over the VAT threshold because they cannot compete by adding an additional 20% to their item price when Chinese sellers are selling so much cheaper. It is already hard enough to compete with Chinese sellers and their prices are already lower than UK company prices, adding VAT is death to UK online small businesses. However, this is not even the true problem. The real problem is the fact that HMRC has no way of making these sellers/factories prove the real value of the items they are importing into the UK. UK sellers have to claim the real value and if they do not they can be audited and fined severely. HMRC cannot do this to outside sellers and China being the worse culprit as their government has already laughed at things like trademark infringement on brands in China. A Chinese seller will claim 10% of the real value of the item they import to the UK, paying next to no Vat at all and then sell their items without charging VAT in them. HMRC cannot access their bank records and if they ask for an invoice it is easy as 1-2-3 to make one up proving the fake value of the item. Brexit is going to ruin small online businesses in the UK because foreign sellers will be able to charge much less and UK buyers simply will not even see UK sellers as the top search result on Amazon and Ebay is price. Lower price always gets the highest search result. I personally have been dealing with this for 3 years and the only way you can stay competitive is have your own brand and be in a niche. I would say that most online sellers in the UK are not selling their own brand and are not in a niche. Many are resellers. HMRC needs to plan ahead for this and put in place a tax on foreign companies or have them provide detailed paperwork and bank records proving value of imports. This will even the playing field a bit and in some cases it could be better for foreign companies to actually find a dealer for their products who is a UK business. That will generate more jobs and more UK online sellers. Lastly, Amazon and Ebay should be forced to show a tab or badge that tells UK buyers they are buying from a foreign seller. Foreign sellers constantly make it a point to name their accounts with 'GB', 'UK', etc and [***] themselves off as being a company based in the UK. It is really a big mess and needs sorting as the abuse has been going on for way too long.

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By Yorick
02nd Nov 2017 20:18

Thanks for the article! It is a pity that there was no mention of the possibility of abolishing VAT in this piece. The United Kingdom could (and in my opinion should) replace VAT with an individual purchase tax after leaving the EU. It existed prior to VAT. VAT is a European Union tax, regressive, bureacratic and deeply unfair and inflexible and unecessarily hard on the poorer members of society. Presumably this regressive tax has only not been criticised over the years because all countries in the EU have to impose it. Of course that isn't relevant to the main point in this article about unfair competition, through the sale of tax-free goods from outside the given tax zone (would apply whether one had VAT or purchase tax) . The obvious observation to make is that this will always be a major drawback of any kind of end tax on retail prices. Two points-the lower the tax the more the problem is reduced, secondly, the more tax laws are generous in relation to what is tax deducctible on the purchase by the self employed and small businesses of retail goods, the less of a problem this is, so for example if VAT is deductible on VAT expenses for say the purchase of furniture than tax free furniture will not be at an advantage, and of course the entire problem only applies to the end user anyway. Companies deduct their VAT costs and are indifferent to whether there is VAT on goods or not. But so far as the individual consuer is concerned, it is certainly a fact that imported goods where there is no sales tax or VAT, enjoy a considerable price advantage. Something to be considered if the problem becomes too acute could be a tariff on imports of the relevant goods. That would mean that goods selling from abroad even online would have to show a tax on their price. Tricky and messy. How nice it would be not to have any tax on end goods anyway, but where would the state make up for the lost revenue?

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By chatman
to Yorick
02nd Nov 2017 21:58

Yorick wrote:
How nice it would be not to have any tax on end goods anyway, but where would the state make up for the lost revenue?

Land and buildings tax, increased IHT, higher IT rates on higher income. financial transaction tax, cutting evasion.

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05th Nov 2017 19:20

If the off-shore sellers did charge VAT, would it make any difference to the fate of their UK-based competitors?

Get real. Who in the UK is going to offer me a quality tyre pressure gauge for £1.19 - delivered? (and I've added 20% to the price I actually paid to get that figure!)

As for replacing VAT by higher rates of income tax on the rich, again, get real. The only way income tax could make up for the loss would be a significant rise in the basic rate and/or a slashing of personal allowances.

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By chatman
to emanresu
05th Nov 2017 19:48

emanresu wrote:

As for replacing VAT by higher rates of income tax on the rich, again, get real. The only way income tax could make up for the loss would be a significant rise in the basic rate and/or a slashing of personal allowances.

Can you show us your calculations please?

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to chatman
05th Nov 2017 20:25
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By chatman
to emanresu
06th Nov 2017 07:10

Thanks but that doesn't really show us how you arrived at your conclusion.

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06th Nov 2017 20:24

Work it out. It seems to me that a bit of arithmetic is what many accountants need nowadays.

The only other data you need is the ratio of VAT to Income tax raised per annum, which is at:

https://www.ifs.org.uk/bns/bn09.pdf

You'll see that if you hit the £100k+ taxpayers you'll have to raise their effective tax rate beyond 100% and if you extend your target group to include all higher rate tax payers, you'll still need to double those tax rates.

Just like the 1970s - but worse, because capital can now fly.

No-one - particularly with the big story in the news this very day - can be anything but shocked at the destabilising effect of wanton abuse of the tax system. In such times, though, ideas such as abandoning VAT and raising revenue using Income Tax - and expecting someone else to shoulder the cost - shouldn't go unchallenged.

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By chatman
to emanresu
06th Nov 2017 20:33

emanresu wrote:

Work it out.

But you claim to have done so already. Can't you show us your workings? It would really help the credibility.

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06th Nov 2017 21:00

There is nothing 'quality' about a £1.19 tyre gauge. Like 99% of stuff from asia it is mass produced junk sold for nothing and everyone thinks they landed that 'excellent deal' and if it breaks i will just get another one. Since owning a company and figuring out what things really cost compared to what they are sold for in stores I can agree that brick and mortar stores crank up the prices and in many cases are taking advantage. However internet sellers in the uk help reduce prices from stores. Foreign sellers, especially chinese, ruin business in the uk. The fact that buyers would not care just to save a couple quid here and there will just result in the uk being half owned by china, just like the usa already is in debt to them massively.

Raising taxes on income or creating new taxes for businesses and business owners to foot the bill is not realistic and completely unfair. The tax system is already unfair, if it is going to be even more demanding on business to foot the bill business will just leave. Bye bye well paid jobs and higher tax income for hmrc.

I am hoping we become a tax haven to be honest. Brexit has not even started to really hit the economy and this idea that we will just weather the storm like in previous times in unrealistic at best. Times have changed, we have little to no market advantages any more and the ones we do (like banking) will be gradually leaving if we do not get brexit right. So far the government is doing a great job of getting it wrong.

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