HMRC estimate that the tax loss from VAT fraud on online marketplaces, where firms that should pay VAT but don’t, was between £1 billion and £1.5 billion in 2016/17.
HMRC further estimates that overseas sellers contributed to approximately 60% of the VAT loss.
It’s likely that these figures are an underestimate. The Public Accounts Committee concluded that HMRC’s estimates of the impact of online VAT fraud are out of date and flawed. Furthermore, most other countries that have dealt with this problem found that their original assumptions as to the scale of the problem proved to be significant underestimates.
Of course, it’s not just the tax lost for investment in public services or reducing the deficit but the fact this reduces the earnings of many small businesses – putting some out of business completely – because of unfair competition, being undercut by companies that can benefit from an unjustified and illegal 20% cost saving.
Faced with increasing pressure to act, the Government introduced new rules in 2016, which have seen around 80,000 new firms register for VAT.
In 2019 HM Treasury and HMRC issued a joint publication highlighting “HMRC successes in tackling online VAT Fraud” which makes reference to these increased registrations as their primary evidence of success.
However, there is little reliable information as to how many of these 80,000 firms have subsequently submitted returns and paid the correct VAT due. In addition, many of these registrations are false, cloned or registered in someone else’s name.
As Steve Dishman, Vice President for Taxes, Europe, Amazon, stated when giving evidence to Parliament’s Public Accounts Committee in 2017; “…the VAT number itself does not guarantee in any way that a company is compliant.”
AAT’s suggested solution
AAT believes that online marketplaces like Amazon, eBay and Etsy should be required to collect and remit all VAT.
This has proved very successful in other countries. In Australia such moves have resulted in 300% more revenue being collected than originally expected – and that’s with a population that’s more than two and half times smaller than the UK, and with a VAT rate of only 10% rather than 20%.
A rapidly increasing number of individual states in the US are introducing the same. For example, eBay calculates, collects, and remits sales tax on behalf of sellers for items shipped to customers in most US states compared to none just two years ago.
Online marketplaces have been required to collect VAT in New Zealand since December 2019 with a population of less than 5m and a VAT rate of 15% (compared to the UK’s 67m population and 20% VAT rate) this is still expected to raise over $125 million per year (approximately £70m).
Perhaps rather surprisingly, given it has fought such proposals across the globe, most notably in Australia, Steve Dishman, Vice President for Taxes, Europe, Amazon told MP’s in 2017, “We could do it and we support the idea in principle”.
Despite the wealth of international evidence, numerous calls for change and online platforms own acceptance of the idea, the British Government does not yet appear willing to compel online marketplaces to collect and remit VAT.
Instead, it continues to rely on the changes made in 2016 and an increased number of VAT registrations as evidence of successful action. Whilst it does so, the UK falls further behind its international peers who are clamping down on VAT fraud by requiring online platforms to collect and remit it. This in turn makes the UK increasingly attractive to fraudsters, whilst legitimate small businesses continue to lose out.
That’s why AAT will be discussing this issue with policy makers in the weeks and months ahead, with a view to delivering positive and effective change.
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Adam Harper is AAT's Director of Strategy and Professional Standards.