Conclusions and recommendations
1.HMRC’s estimate of the impact of online VAT fraud is out of date and flawed. The National Audit Office (NAO) reported that HM Revenue & Customs (HMRC) estimate of the scale of the problem in 2015–16 was subject to a high level of uncertainty, as did the Office for Budget Responsibility (OBR). Furthermore, HMRC’s estimate does not account for the wider effects of online VAT fraud, such as distorting fair competition in the market and undermining perceptions of equity and fairness in the tax system. Legitimate businesses are struggling to compete with sellers who do not charge VAT when they should and are thus gaining a 20% price advantage. Online sales are continuing to increase (in 2016, 14.5% of all UK retail sales were online, up from 2% in 2006) but HMRC has no plans to update its estimate of the tax lost due to online VAT fraud. HMRC told us it carries out threat assessments of new risks, and is constantly looking at how it can be more responsive.
Recommendation: HMRC should, by March 2018, produce an update of its estimate of the scale and impact of the online VAT fraud tax gap, incorporating new evidence and assessments of new risks where applicable. It should also consider the impacts on legitimate business and wider impact on the economy such as job losses when a business is struggling.
2.HMRC has been slow to get to grips with the problem and is not yet doing enough to tackle it. Previous Committee reports have highlighted the problem of online VAT fraud as a growing risk. Online VAT fraud leads to a significant loss of revenue to the Exchequer, depriving public services of funds at a time of austerity. However, HMRC has only recently begun to take the problem seriously. Rather than try to use its pre-existing powers, HMRC waited until the introduction of new measures under the Finance Act 2016 before it attempted to hold online marketplaces responsible for VAT which had been fraudulently evaded by traders on their marketplaces. Even so, HMRC has been too cautious in using these new powers. HMRC has not named and shamed non-compliant traders and so far has not prosecuted a single seller for committing online VAT fraud. HMRC told us that it needs new powers to enable it to close the online VAT fraud tax gap to a level comparable to that for VAT as a whole (9.6% in 2015–16). The Government has proposed a new method for collecting VAT (known as split payments) and this could be an effective solution to the problem but the introduction of such an approach is a long way off. The European Union (EU) is also currently considering placing liability on online marketplaces for VAT due on online sales.
Recommendation: HMRC should inject much more urgency to tackling the problem of online VAT fraud by:
- making much stronger and more extensive use of its existing powers, especially third party liability,
- speeding up the introduction of new measures, such as the split payment method of collecting VAT, and
- exploring new measures. In particular, HMRC needs to focus on ensuring the marketplace platforms are liable for VAT evasion. One option would be for HMRC to require online marketplaces to withold VAT when a sale is made and then pass it directly to HMRC.
3.Online marketplaces and HMRC are not doing enough to work together to tackle the problem, and online marketplaces continue to earn their commissions and therefore profit from people who are defrauding the British taxpayer. Amazon and eBay assured us that they stopped all non-compliant sellers from using their sites as soon as HMRC notified them. Amazon and eBay told us it was in their own interest, given the risk to their reputations, to ensure a level playing field for all of their sellers and remove ‘bad actors’ from their sites. Amazon and eBay explained they carry out a number of checks on sellers that operate on their platforms, such as validating sellers’ VAT numbers; linking related accounts to get a complete picture of sellers’ activity; and checking addresses to stop previously shut-down sellers re-emerging in a different form. Amazon and eBay claimed they were proactive in seeking out those without VAT numbers, with eBay policy in particular going beyond what it is legally required to do. However, in a written submission received after our evidence session, Retailers Against VAT Abuse Schemes (RAVAS) and VATfraud.org took issue with a number of the claims made by Amazon and eBay about how proactive they were in tackling rogue traders using their platforms. Online marketplaces could, in principle, carry out further checks to assess compliance of sellers on their platforms with UK VAT tax law, though HMRC input would be needed to fully establish non-compliance. Amazon and eBay told us they plan, over the next 6 months, to increase their technological capacity and that they saw data-sharing as an effective way to tackle the problem. This is not, however, a new issue–so it is bewildering to us that these big companies have taken such little action to date. Amazon for example only started collecting VAT numbers from non-EU sellers six months ago and told the Committee that knowing whether a non-EU seller has a valid VAT number is not a critical data point. HMRC told us there is not complete transparency between HMRC and online marketplaces, and it does not yet have access to all the data it needs from online marketplaces to identify non-compliant traders. It has faced resistance from online marketplaces in sharing data that are not held within the UK’s jurisdiction. In the meantime, Amazon and eBay, amongst other online marketplaces, continue to profit from fraudulent activities taking place on their sites.
Recommendation: HMRC should, by March 2018, put in place an agreement, applicable across the whole online marketplace, that sets out the collaborative working arrangements between HMRC and the online marketplaces, including details of co-operation, data sharing and expectations of a prompt response to evidence of non-compliance. This should include a requirement for all online marketplaces to ensure that a valid VAT number is showing for any non-EU trader selling goods to customers in the UK, where those goods are already in the UK. In the absence of a legal requirement to do so we would expect online marketplaces to implement this measure voluntarily.
4.It is not clear how HMRC will assess the effectiveness of its new powers in reducing the level of online VAT fraud or whether it will clawback VAT unpaid in previous years from newly registered traders. Professor de la Feria, an expert in tax law, told us the new legislation will not solve all the problems but will be helpful, and that it would be reasonable to expect the impact of the new joint and several liability measures, introduced in September 2016, to become apparent within a year. HMRC highlighted to us the increase in new VAT registrations (from 700 to 17,500) since the new measures came into force last September as evidence of a positive impact. HMRC told us it expects to collect £50 million more VAT, in 2017, from those traders that have recently registered for VAT. However, we stressed that HMRC needs to check whether all the newly registered sellers have submitted returns and paid the correct VAT due, including clawing back previously unpaid VAT, going back as many years as necessary. Even if it is collected, the additional amount is a small proportion of the total loss, which HMRC estimates to be £1 billion to £1.5 billion. HMRC does not know enough about the reasons why online VAT fraud and error happens, such as the extent to which it is deliberate or unintentional. RAVAS told us that sellers were sceptical that online marketplaces would ever be held liable for any VAT evaded by sellers on their platforms under the new joint and several liability measure.
Recommendation: HMRC should assess the effectiveness of its response to the problem of online VAT fraud and report to the Committee by March 2018, including:
- setting targets, short and long term, for reducing the amount of VAT lost through non-compliant online sales; and
- telling us how much it has collected from newly registered traders, including amounts of unpaid VAT from previous years.
5.HMRC does not know how many fulfilment houses are in the UK and is therefore unable to systematically target the most blatant route for online VAT tax evasion. Overseas sellers often choose to export goods to the UK and store them in fulfilment houses (warehouses where goods can be kept before delivery to customers), before selling these goods to UK customers through online marketplaces. The VAT rules require that all traders based outside the 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. Fulfilment houses are therefore a key part of the transaction chain between sellers based outside the EU and consumers in the UK. Some online marketplaces, such as Amazon, also own and operate their own fulfilment houses. HMRC does not know how many fulfilment houses there are in the UK, estimating the number to be somewhere between 500 and 3,000. The Fulfilment House Due Diligence Scheme, due to come into effect in April 2018, will require fulfilment houses to register with HMRC. However, it is not clear how HMRC plans to enforce this requirement. HMRC was receptive to our suggestion that it would make sense to require overseas sellers registering for VAT to specify which fulfilment houses they work with.
Recommendation: HMRC should, as a pre-requisite to the implementation of the Fulfilment House Due Diligence Scheme, undertake a definitive assessment of the scale of the fulfilment house industry, and how it intends the process of registration for the scheme to work efficiently and effectively.
6.Online VAT tax evasion is already a complicated issue, and we are concerned about HMRC’s ability to deal with new challenges to the problem which may be posed by the UK’s exit from the EU. There is considerable uncertainty over the exact terms on which the UK will leave the EU. It is therefore difficult to be sure of its effect on online VAT fraud. Sellers based in the EU may end up operating under the same VAT terms as currently apply to non-EU sellers and therefore may also be tempted to not charge VAT in the same way. Evidence exists, such as the recent European Anti-Fraud Office (OLAF) report on customs duties, that highlight significant control weaknesses at the UK border even before the UK exit from the EU. Border controls will remain important to the problem of online VAT fraud even when the other measures (joint and several liability, the Fulfilment House Due Diligence Scheme and split payments) are in place. HMRC expects leaving the EU to pose four big challenges to the department as a whole: customs; indirect taxes, particularly VAT; data sharing with other EU countries; and the welfare state (with respect to treatment of EU citizens). The Department told us it is confident about its ability to identify new emerging risks but we remain sceptical about HMRC’s ability with its current resources and skill set to rise to the many challenges that are ahead.
Recommendation: The Committee intends to regularly monitor HMRC’s progress in preparing for the UK exiting the EU and expects HMRC to be in a position to update us at future appearances.
17 October 2017