Progress in tackling online VAT fraud Contents

1Embedding new compliance measures

1.We took evidence from HM Revenue & Customs (HMRC) in April 2018 as part of an inquiry into the Department’s performance in a number of areas of its business.1 This report covers issues raised at the evidence session specifically in relation to online VAT fraud. This report also follows up issues raised in our previous report on this subject, published in October 2017.2

2.Online sales attract VAT in the same way as goods bought in person. The VAT rules require that all traders based outside the European Union (EU), selling goods online to customers in the UK, should charge VAT if their goods are already in the UK at the point of sale. The sellers should be registered with HMRC and are required to submit regular VAT returns. However, some sellers from outside the EU who bring goods into the UK and store them in fulfilment houses are not charging VAT on those online sales. This may be due to deliberate fraud, a mistake, or because they do not understand the rules.3 HMRC’s latest estimate is that online VAT fraud and error cost between £1 billion and £1.5 billion in lost tax revenue in 2016–17.4

3.The previous Committee first identified the problem of online VAT fraud in 2011.5 In our last report on this issue we concluded that HMRC had been slow to get to grips with the problem and was not yet doing enough to tackle it.6 In its written response to our last report HMRC set out that it had increased the level of resource deployed to tackle online VAT fraud and error to 171 staff. HMRC noted that it had also deployed 44 permanent and 22 flexible staff to form an Import Fraud frontline taskforce.7

4.HMRC now has a range of new measures to tackle the issue of online VAT fraud.8 These measures are: extended powers to hold online marketplaces jointly and severally liable for unpaid VAT of a business arising from sales via that online marketplace; a requirement for online marketplaces to display a valid VAT number for their traders, when they are provided with one; a scheme to register fulfilment houses; and a Memorandum of Understanding to promote collaboration between HMRC and online marketplaces, greater sharing of information, better online marketplace guidance for their sellers and a more effective response by online marketplaces to evidence of non-compliance.9 With the help of these new measures HMRC expects to raise just under an extra £1 billion by 2023, although it noted that it would be “a slog” to get that amount in on an ongoing basis. HMRC committed to provide us with a note of the additional revenue expected from the new measures over the next few years.10

5.We asked HMRC for an update on compliance and how much work would have to be done to reclaim unpaid VAT from newly registered traders.11 HMRC told us that there had been 27,550 applications to register for VAT from overseas online retail businesses since new measures were announced in March 2016 up to the end of January 2018.12 HMRC told us that all of those traders were registered and checked for compliance and that it was receiving additional VAT of £100 million.13

6.We also asked about progress in using HMRC’s new joint and several liability measures. HMRC told us it had opened about 2,100 investigations into non-compliant overseas businesses selling via online marketplaces between September 2016 and the end of January 2018.14 HMRC told us that it had issued around 1,300 joint and several liability notices and identified and assessed some £120 million in compliance yield.15 HMRC committed to write to us with information on the number of joint and several liability notices issued to traders who were not listed on or did not come through via RAVAS.16

7.We were concerned that “phoenixism” might be a problem in tackling online VAT fraud, where an online company closes, to avoid its VAT obligations, and then reopens under a different name. HMRC told us it was aware of the risk and was monitoring it, and that it was a general issue over and above VAT. HMRC said its intelligence suggested that online retailers with a good history would want to comply rather than use a phoenix company, as this would lead to the loss of their trader history.17

8.A submission to the Committee from RAVAS and VATFraud, groups representing UK traders, has alleged that HMRC believes much of the online VAT fraud is in fact due to ignorance of the rules.18 We pointed out to HMRC that ignorance of the rules was not an excuse for non-payment of VAT. HMRC told us that ignorance did not remove anyone’s obligation to pay VAT. HMRC considered there were a range of different behaviours, from deliberate evasion through to unintentional error. These behaviours required different responses from HMRC. Where a trader was willing to comply but was ignorant or had found the system too difficult, steps like getting the online marketplaces to engage and communicate, and setting up HMRC’s Chinese language website, would help. Fraudsters, on the other hand, required a different response from HMRC.19

1 Committee of Public Accounts, Oral evidence taken on 30 April 2018, HC (2017–19) 972

2 Committee of Public Accounts, Tackling online VAT fraud and error, First Report of Session 2017–19, HC 312, 18 October 2017

3 Q 111; Committee of Public Accounts, Tackling online VAT fraud and error, First Report of Session 2017–19, HC 312, 18 October 2017, para 3

5 Committee of Public Accounts, Tackling online VAT fraud and error, First Report of Session 2017–19, HC 312, October 2017, para 9

6 Committee of Public Accounts, Tackling online VAT fraud and error, First Report of Session 2017–19, HC 312, October 2017, para 2

8 Q 91

10 Qq 93, 94, 107. In a note to the Committee, dated 24 May 18, HMRC provided details of the expected yield for each year between 2016–17 and 2022–23, split between Budget 2016 measures (the initial measure for joint and several liability for online marketplaces and the Fulfilment House Due Diligence Scheme) and Budget 2017 measures (extensions to the joint and several liability for online marketplaces and the new measure covering the display of VAT Registration numbers).

11 Qq 88, 104

13 Qq 88, 105

15 Qq 89, 90, 105, 106

16 Qq 109, 110. is a campaign set up by a group of UK eBay and Amazon business sellers. RAVAS (Retailers Against VAT Abuse Schemes) is an independent pressure group of UK retailers. In a note to the Committee, dated 24 May 18, HMRC stated “2,144 notices (or 83% of all notices) have been issued to date in respect of traders who were identified by HMRC activity and targeting. 407 notices have been issued to businesses that are listed on (or 19%).”

17 Q 108

18 RAVAS and VATFraud (HPR0001)

19 Q 111

Published: 29 June 2018