VAT and online trading: Part 4 – Risk areas
Neil Warren considers the three main risk areas related to online trading which are most frequently picked for closer examination by HMRC.
Determining whether the trader is the agent or principal in the relationship should be number one priority for business owners to ensure they do not incur the wrath of HMRC.
As I explained in my first article in this series on online VAT issues, it is vital to always establish whether the business that owns a website is directly selling goods or services to the punter, or whether it is acting as agent and only receiving a commission.
Why is this so important? The answer is because the income of the website owner usually exceeds the VAT registration threshold but individual sellers on the site often trade below the UK’s annual registration threshold of £85,000. The difference between VAT on say, 100% or 30% of sales is massive. There’s a big potential tax yield here for HMRC if the agency arrangements are being incorrectly applied.
It is easy for HMRC officers to walk down the high street of a local town, asking business owners why they are not VAT registered. In cases when the officer doesn’t believe the owner’s answer that annual sales are less than £85,000, the officer has a number of techniques he can use, such as calling into a restaurant at the end of a night’s business and asking for a till reading to show how much trading has been done.
But it is not so easy to identify online sellers who should be registered for VAT. Are the sellers even based in the UK? Is most of the website income earned from overseas businesses or non-EU customers, where it might be outside the scope of VAT and ignored for registration purposes?
As I write these words, I can hear you shouting out: “That’s their problem.” But the challenge for tax advisers and business owners is to do regular turnover checks to make sure an online business hasn’t exceeded the annual registration threshold at the end of any calendar month.
Always be clear about what income lies outside the scope of UK VAT under the place of supply rules and ensure it is excluded from the calculations.
There can sometimes be confusion about the tax point for the receipt of commission by an agent. Imagine the following situation:
- Retailer A sells goods online via website B.
- 13 July: customer C pays for and buys goods costing £1,000, making payment to B.
- 31 July: website B sends a statement to Retailer A, showing a net payment due of £800 ie £1,000 gross sales less 20% selling commission.
- 3 August: payment is made to retailer A.
The contract between retailer A and website B is likely to be for a continuous supply of agency services, with a tax point triggered by the earlier date of B’s invoice to A or receipt of payment, whichever happens first. The payment by customer C does not usually trigger a tax point for commission purposes – the website is holding this money on behalf of the seller as an agent. The website’s payment date will be 3 August in this example.
Don’t forget that Retailer A has to pay output tax on £1,000 and not £800 if it is registered for VAT, ie the gross sales figure. For further guidance see HMRC’s VAT Manual VATTOS8300.
My personal view is that HMRC would probably like to allocate more staff resources to check VAT compliance issues linked to online trading. I suspect that utopian wish will not happen for a long time.
There are big VAT changes in the pipeline with online marketplaces and online trading generally as we approach 31 December and the end of the Brexit transitional deal. Look out for my new series on Brexit: VAT and Customs implications.