HMRC not doing enough to tackle £1.5bn online VAT losses

HMRC’s understanding of the amount of tax lost to online VAT fraud and error, which it says may be up to £1.5bn annually, and its efforts to tackle the problem, have been criticised by the National Audit Office (NAO) as lacking sufficient detail or urgency

The NAO has conducted an investigation into the concerns raised by the public accounts committee and a number of UK trader organisations that online sellers based outside the EU are not charging VAT on their goods located in the UK when sold to UK customers. Online sales accounted for 14.5% of all UK retail sales in 2016 with just over half of these conducted through online marketplaces.

HMRC’s estimate of a loss of between £1bn and £1.5bn in tax revenue in 2015-16 is described by the NAO as ‘subject to a high level of uncertainty’. This estimate represents between 8% and 12% of the total VAT tax gap of £12.2bn for that year, but the NAO says UK trader groups believe the problem is widespread, and that some of the biggest online sellers of particular products, such as mobile phone accessories, are not charging VAT. These estimates also exclude wider impacts, such as the distortion of the competitive market landscape.

Trader groups and the Chartered Trading Standards Institute claim that online VAT fraud has been a problem as early as 2009, which has got significantly worse in the past five years, during which time many sellers have moved to a fulfilment house model where goods are stored and delivered from a UK warehouse.

While HMRC did identify online VAT fraud and error as one of its key risks in 2014 and began to increase resources in this area in 2015, the NAO is critical of its efforts.

It says the UK trader groups who raised the issue report having experienced the impact of this problem through progressively fewer sales. They consider HMRC has been slow in reacting to the emerging problem of online VAT fraud and error and that there do not seem to be penalties of sufficient severity to act as a substantial deterrent.

The NAO points out that HMRC’s own strategic threat assessment, carried out in 2014, concluded it was highly likely that both organised criminal groups based in the UK and overseas sellers in China were using fulfilment houses to facilitate the transit of undervalued or misclassified goods, or both, from China to the UK for sale online.

However, the investigation found that HMRC still cannot be certain how many fulfilment houses there are in the UK and, in 2017, estimated the number at between 500 and 3,000.

HMRC’s assessment is that online VAT losses are due to a range of non-compliant behaviours, but the NAO says it has not yet been able to assess how much is due to lack of awareness, error or deliberate fraud. UK trader groups told the investigation there is more that HMRC and online marketplaces could do with seller data which would identify potentially non-compliant sellers.

To date, there have been no prosecutions for online VAT fraud but HMRC has carried out many civil operations, including 279 investigations of businesses and 373 compliance interventions in 2016-17.

In September 2016 HMRC was given new joint and several liability powers to hold online marketplaces liable for non-payment of VAT when HMRC has informed them of an issue with a seller, and they do not subsequently take appropriate action. Since September 2016, HMRC has been testing the powers on 200 high-risk sellers and has issued 27 pre-notifications and 37 full notices as at March 2017. HMRC told the investigation that this will have a wide deterrent effect and plans to increase the scale of its activities significantly from April 2017.

In addition, from April 2018, fulfilment houses will need to register with HMRC and carry out due diligence on their overseas customers. HMRC has estimated that the new powers could generate additional revenue of around £875m between 2016 and 2021, and will cost £24m in 2017-18.

The report concludes: ‘It is too soon to conclude on the effectiveness and impact of HMRC’s new powers, and whether the resources devoted by HMRC to using them match the scale of the problem.

‘We recognise that HMRC must consider effort and efficiency in collecting VAT but its enforcement approach to online trade appears likely to continue the existing unfair advantage as perceived by UK trader groups.

‘This is contrary to HMRC’s policy of encouraging voluntary compliance and it does not take account of the powerful effect that HMRC’s enforcement approach has on the operation of the online market as a whole. We intend to return to this subject in the future.’

An HMRC spokeswoman said: ‘The UK has led the way in holding online marketplaces jointly liable for VAT evaded overseas, and new reforms will secure £875m for the UK taxpayer.

‘In less than a year, those registering for VAT has risen tenfold to 8,000 in 2016.’

The NAO report Investigation into overseas sellers failing to charge VAT on online sales is here.

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