HMRC has announced an agreement to tackle VAT fraud on online marketplace platforms, encouraging all online marketplaces operating in the UK to sign up to promote VAT compliance.
The agreement comes after estimates released by HMRC put the amount of tax loss from VAT fraud and error on online marketplaces between £1bn-£1.5bn in 2016 and 2017.
Under joint and several liability (JSL) rules, which received Royal Assent in 2016, HMRC already has the power to hold online marketplaces to account for VAT fraud committed by sellers on their platforms. Since the rules became effective, HMRC has opened 2,100 investigations into non-compliant businesses overseas and has seen applications to register for VAT rise to 27,550 between March 2016 to January 2018, compared to just 1,650 in 2015.
The tax authority said that by signing the new agreement, platforms had a responsibility to “ensure their sellers understand tax rules and prevent fraud from happening on their watch”.
The agreement commits platforms to educating online sellers from the UK and beyond about their VAT obligations in the UK. This can be achieved by either providing their own guidance or directing sellers to guidance offered by HMRC.
Platforms will also be expected by HMRC to respond “swiftly” if they receive notification from the tax authority that sellers are not complying with VAT rules. Platforms will also be tasked with implementing systems through which appropriate action can be taken in such cases.
In addition, HMRC has asked that platforms provide information about their sellers – in line with legal regulations – on request from the tax authority.
Once signed up to the agreement, platforms will be added to a published list of signatories. If platforms fail to meet their commitments, they face removal from the list.
Financial secretary to the Treasury Mel Stride said: “The growth of online marketplaces has helped many businesses to sell more products across the UK and has contributed greatly to the economy.
“However, there is a small minority of sellers not paying their fair share of tax, and we’re committed to working with marketplaces on multiple levels to tackle tax evasion.”
John Thompson, chief executive of HMRC, said: “The UK has already led the way in holding online marketplaces accountable for VAT fraud committed on their platforms.
“The agreement goes even further to tackle this issue, with online marketplaces committing to helping their sellers understand their tax responsibilities and ensuring we have the information we need to take action against those who do not play by the rules.”
Dominic Arnold, partner at Moore Stephens, said that the proposals were “unprecedented”.
“These proposals are quite unprecedented from HMRC. It is asking online marketplaces to look for signs of tax evasion amongst its users, throw them off the site and report them to the tax inspector,” he said
“It is taking the outsourcing of tax compliance work to a new level,” Arnold added.
Arnold also said that the agreement would likely lead to a “sharp rise” in HMRC prosecutions of e-commerce traders.
He raised concerns that the initiative would present a “huge financial burden” for small retailers that did not have the resources of large platforms, such as eBay and Amazon.
“Whilst larger platforms such as eBay and Amazon have the resources to monitor users of their platform, the proposals represent a huge financial burden for smaller retailers.
“The message from HMRC is clear: it is no longer good enough to pay your own tax, but you need to make sure everyone you are associated with is also paying the right tax too.”
Initiative to ‘revolutionise’ UK tax collection
Sue Rathmell, VAT director at MHA MacIntyre Hudson, said that the new data sharing agreement, in conjunction with other measures to tackle VAT fraud, could “really revolutionise UK tax collection and significantly reduce tax losses”.
She did however express concern that the measure needed the backing of smaller marketplaces.
“The agreement outlines how HMRC and online marketplaces will work together, share data about online sellers and deal with non-compliance. While it could represent a massive commitment by online marketplace giants Amazon and eBay, and is a positive step by HMRC, agreement from smaller markets shouldn’t be downplayed as their involvement is vital – otherwise sellers could simply move to smaller marketplaces to avoid HMRC’s grasp.”
The approach was a “transformation in how tax fraud is managed”, Rathmell said.
She continued: “The responsibility is shifting to a peer-to-peer policing approach; those that register will put pressure on others to sign up as well. It’s only fair that overseas sellers pay the right amount of VAT when they sell in the UK and reducing this fraud helps UK businesses compete on a level playing field. Tax fraud impacts the entire UK public and marketplaces can’t turn a blind eye – they must play a wider role in ensuring users are tax compliant.”
Last year, the Public Accounts Committee called on HMRC to act with urgency to tackle VAT fraud, calling for a tougher stance in relation to online marketplaces.