New VAT proposals: the fight against online VAT evasion

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Neil Warren considers proposals which are designed to increase the VAT collected from goods sold through online marketplaces by both UK and non-UK businesses.

These proposals are set out in a guidance note issued with the Autumn Budget, and are included in Finance Bill 2017-2018, clause 38. The new provisions will take effect from the date of Royal Assent of FA 2018, expected to be in late March 2018.

Difference between UK and non-UK businesses

The government is determined to clamp down on the volume of “VAT free” sales made by both UK and non-UK businesses on online marketplaces. In reality, some sales are correctly “VAT free” if, for example, they are being sold by a UK business that is trading below the registration threshold of £85,000. But a non-UK business holding stock in the UK has a zero VAT-free threshold, so will need to get a UK VAT number even if its sales are only €1!

UK business selling goods in the UK

Assuming the business is VAT registered, it will usually provide its VAT number to the online marketplace. The online marketplace will be obliged to check that the number is valid and relates to the seller, ie it is not a fabricated number or one that has been copied from another business. The best way to check VAT numbers is by referring to the VIES website.

The online marketplace will then display the VAT number on its website in connection with any goods being offered for sale by the UK business.

UK business is not VAT registered

What happens if a UK business trades through an online marketplace but does not have a UK VAT number, because its taxable UK sales are less than £85,000? As long as the business is correctly trading under the VAT threshold, and any HMRC enquiry agrees that this is the correct position, then there is no issue.

If HMRC find that the business should be VAT registered when it is not so registered, it is non-compliant. In that case the proposed new law will give HMRC the power to issue a notice to the online marketplace, which means the marketplace will be jointly and severally liable for any VAT underpaid by the non-compliant business.

The online marketplace will usually be given a 30 day period before the notice becomes effective, to give it a chance to discuss the VAT issues with the seller.

Non-UK business selling goods in the UK

A non-UK business holding goods and selling them in the UK gets a zero VAT registration threshold.

The proposed legislation states that if the online marketplace “knew or should have known” that the business should have been registered for UK VAT, it can be held jointly and severally liable for the unpaid VAT if, within 60 days of knowing, it does not take action to correct the problem.

The 60-day period gives the marketplace the opportunity to contact the overseas business to alert it to its UK VAT obligations. It also provides time to deal with the situation where the business may have applied to HMRC for a VAT number but experienced a delay in the number being issued.

As with UK businesses, the online marketplace is obliged to check the validity of the UK VAT number given to it and display it on its website.

Conclusion

No VAT measure that puts onus on a third party to do HMRC’s work is ever totally effective. The phrase “knew or should have known” is always packed with complications. It will also be difficult for the marketplace to track the requirements of sellers to register for VAT. For example, the sales made through the online marketplace site may be only a small part of the seller’s total sales in the UK – how will the online marketplace know this?

As far as non-UK businesses are concerned, the marketplace will only be able to reach a decision about whether there is a need for a UK registration if it knows three things:

  • the location of the business
  • the location of the goods
  • whether the business has made any UK sales

This package of information puts a lot of responsibility on the online marketplace to ensure the VAT treatment is correct.

 

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

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