HMRC looks into overseas traders trying to cheat UK VAT rulesby
HMRC is writing to approximately 12,000 businesses it believes may be based overseas but incorporated in the UK, in some cases in order to avoid charging output VAT on their UK sales.
Since a change in the law in January 2021, online marketplaces (OMPs) such as Amazon, eBay and ETSY must collect VAT on sales by overseas traders on their platforms and pay it to HMRC. According to HMRC, some overseas traders are trying to cheat the rules by incorporating in the UK when they have no presence here. The result is that the OMP will not charge them the output VAT and the trader does not pay it to HMRC.
This has the double effect of legitimate traders being undercut and depriving the treasury of VAT revenue. As part of HMRC’s ongoing work to crack down on such behaviour, the tax authority is sending letters to businesses it suspects may be Non-Established Taxable Persons (NETPs).
What is an NETP?
An NETP is any person who is not normally resident in the UK, does not have a UK establishment and, in the case of a company, is not incorporated in the UK.
Where a business has NETP status, HMRC may inform the OMP of this. The OMP will be required to deduct output VAT from the trader’s sales and remit this to HMRC under the marketplace liability guidelines.
HMRC is sending a “one-to-many” (OTM) letter to businesses it has reason to believe may be NETPs to provide an opportunity to confirm its assessment of their status. One indicator that a business may be an NETP is if it is registered at an agent or serviced office address, suggesting it may not have a permanent physical presence in the UK.
Establishing a UK presence
Being incorporated in the UK does not necessarily mean that a business has a UK presence. As stated in HMRC’s VAT notice 700/1, a UK establishment exists if either the:
- place where essential management decisions are made and the business’s central administration is carried out is in the UK; or
- business has a permanent physical presence with the human and technical resources to make or receive taxable supplies in the UK.
The notice continues: “We would normally consider a company which is incorporated in the UK to have an establishment in the UK as long as it’s able to receive business supplies at its registered office.”
A registered, serviced or virtual office is not enough to create a business establishment. For example, if you are a company incorporated in the UK, sell all goods using an online marketplace and only have a fulfilment centre in the UK, then you are not UK-established.
What does NETP status mean for a trader?
Having NETP status means that the OMP will typically collect output VAT on the business’ supplies and pay it directly to HMRC. NETPs that make supplies in the UK are not subject to the VAT registration turnover threshold, meaning that they need to be registered for VAT, even if their turnover is below £85,000.
If the recipient does not respond to the letter, HMRC will take this as confirmation that the trader is based overseas and may inform the OMP of their NETP status.
If you or your client receive the letter
If you or your client agree with HMRC’s assessment that they are an NETP, there is no further action they need to take. HMRC will update the VAT register with the business’ NETP status and may also disclose this to the relevant OMP(s).
If businesses or their agents think they meet the criteria to be established in the UK for VAT, they need to send evidence of this to HMRC within 30 days from the date on the letter. Acceptable evidence is listed in the OTM letter and includes:
- rental/lease/tenancy agreements (with proof of payment);
- records of staff employed at the business address (with the PAYE reference of the business);
- council tax bills;
- utility bills; or
- bank statements.
An HMRC spokesperson said: “We’re doing this to ensure VAT records are up to date and the correct treatment of VAT is applied by online marketplaces facilitating the sales for overseas-based sellers.”
Tale as old as time
The exploitation of loopholes by overseas businesses to wriggle out of charging VAT on sales is by no means a new issue.
Some of our readers will remember back in 2012 when the Government closed the Low Value Consignment Relief “loophole” which large corporations had been exploiting to sell mail-order CDs from the Channel Islands to the UK without charging VAT.
More recently, in 2023 Dylan Davies suffered the consequences of c.11,000 overseas businesses registering for VAT at his home address in order to claim a UK presence. HMRC now undertakes checks to prevent incorrect addresses being used for VAT registration, including where it is believed a business is not established in the UK.
Tightening of the rules and increased scrutiny from HMRC will be welcomed by legitimate business owners struggling to compete against overseas traders that lop 16.67% off the sales price of like-for-like products.
Further information on the impacts of being a NETP can be found on the GOV.UK site Who should register for VAT (VAT Notice 700/1).
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Consulting Tax Editor for AccountingWEB.
I have spent the last 10 years teaching the accountants of the future, mainly ICAEW advanced level corporate reporting. I also cover tax news and write and edit tax updates for other publishers including PTP Limited.