Tackling online VAT fraud and error Contents

1Impact and HMRC’s response

1.On the basis of a report by the Comptroller and Auditor General, we took evidence from HM Revenue & Customs (HMRC) on the issue of overseas sellers failing to charge VAT on online sales.1 We also took evidence from Amazon and eBay, two of the best known online marketplaces, from a representative of Retailers Against VAT Abuse Schemes (RAVAS), and from Rita de la Feria, Professor of Tax Law at the University of Leeds.

2.Online sales accounted for 14.5% of all UK retail sales in 2016, up from 2% in 2006. Just over 50% of these sales were non-store sales, mainly through online marketplaces where buyers and sellers can meet and transact. Amazon and eBay are two of the most well-known online marketplaces but there are many others. Some overseas sellers now choose to export goods to the UK and store them in fulfilment houses, before selling these goods to UK customers through online marketplaces. Some of these fulfilment houses are owned by online marketplaces (for example Amazon) and some are independent businesses.2

3.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. In these cases sellers should pay import VAT and customs duties when the goods are imported, and charge their customers VAT on the final sale price. 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

4.HMRC is responsible for collecting and enforcing payment of VAT. In 2015–16 net VAT revenue totalled £116 billion, with a tax gap (the difference between the amount that should in theory have been collected and the amount actually collected) of an estimated £12.2 billion. HMRC does not have estimates of online VAT fraud and error losses before 2015–16.4

5.In April 2016 the previous Committee of Public Accounts reported on Tackling Tax Fraud. At that time HMRC had not been able to provide the Committee with a firm estimate of the tax losses associated with online sales. The Committee reported that HMRC had been slow to respond to the growing risk of VAT fraud by internet traders, particularly given that the Committee had also taken evidence on issues relating to VAT fraud three times during 2013, including the problem of goods having been purchased online without VAT having been charged.5 In September 2016 HMRC introduced new legal powers to tackle online VAT fraud and error. The new powers include making online marketplaces potentially jointly and severally liable for non-payment of VAT.6

Impact of online VAT fraud and error

6.Online VAT fraud and error is costing the taxpayer a lot of money, and depriving public services of vital funds at a time of austerity. HMRC has estimated that VAT fraud and error in online sales cost between £1 billion and £1.5 billion in lost tax revenue in 2015–16, but this estimate is subject to a high level of uncertainty.7 The Office for Budget Responsibility (OBR) reviewed HMRC’s analysis as part of its independent review of Budget costings. While certifying the forecast yield from the new measures, OBR gave HMRC’s measure a ‘high’ uncertainty rating.8 As well as the revenue losses there are other wider costs which HMRC’s estimate of the size of the problem excludes.9 RAVAS told us that British businesses cannot compete against non-EU sellers importing goods and evading VAT.10 Businesses that follow the tax law of the country, in the face of the unfair competitive advantage enjoyed by non-EU tax evaders, not only lose trade but face the risk of going out of business.11 Professor de la Feria highlighted the adverse impact of such fraudulent practices on taxpayers’ perceptions of the equality and fairness of the tax system.12

7.Since HMRC’s estimate of losses in 2015–16, there has been further significant growth in online sales.13 Non-store online sales in the UK grew to £26.1 billion in 2016 following an annual growth average of 18% in the preceding five years.14 We asked HMRC about its plans for a more up-to-date assessment of the size of the problem. HMRC explained it had no plans to undertake another exercise to generate a more precise estimate of the size of the problem but agreed to keep it under review.15

8.Online VAT fraud and error losses of up to £1.5 billion equate to £7.5 billion-worth of sales, about a third of all sales that take place on online marketplaces.16 HMRC acknowledged the level of the tax gap in relation to non-EU sellers selling on online platforms is significantly higher than the ‘normal’ level of tax gap across the whole of the VAT tax regime (9.6% in 2015–16).17 While Amazon and eBay, the two big online marketplaces in the UK, were aware of HMRC’s estimate of the scale of the problem, eBay told us that it could not comment on the validity of HMRC’s estimate. eBay informed us that, in the previous year, it had suspended 184 seller accounts responsible for £4.6 million of revenue.18 Amazon told us that it had suspended 416 sellers responsible for about £92 million of revenue and £18 million of VAT.19

HMRC’s response to the problem of online VAT fraud and error

9.The previous Committee first identified the problem of online VAT fraud in 2011.20 We have seen evidence from various sources that suggests HMRC’s response to online VAT fraud has lacked urgency and rigour. RAVAS told us that the reason campaign groups such as theirs exist is because they have not seen enough action from HMRC in the face of overwhelming evidence of tax evasion.21 RAVAS explained how easy it is to identify companies that appear to evade VAT on their online sales.22 Our experience from a mystery shopping exercise that we carried out also confirmed the ease of identifying apparent tax evaders.23 A recent report issued by the European Anti-Fraud Office (OLAF) highlighted significant weaknesses in the policing of the UK borders.24

10.We also heard concerns from Professor de la Feria that HMRC has not been doing enough to tackle this problem despite the required legislation being in place. Professor de la Feria suspected this was due to HMRC considering that it was not cost-effective to pursue this type of fraud.25 Professor de la Feria told us that the existing laws, even before the introduction of the new 2016 measures, provided scope for HMRC to hold online marketplaces and fulfilment houses to account for the fraudulent activities that these marketplaces and fulfilment houses “should have known” about.26 Professor de la Feria highlighted the difficulties of tracking down sellers that are based outside the EU to enforce compliance with tax laws. To help address this problem the EU Council is planning to introduce a new third-party liability rule effectively making the online marketplaces responsible for accounting for VAT including any that is uncollected. HMRC considers that this measure could be helpful but that there are more strategic solutions to the problem, such as split payments.27

11.The Department explained that there are three main parties involved in the particular type of online transactions suffering from VAT fraud: a seller, a fulfilment house and a consumer. HMRC told us that it has been seeking to develop a systemic solution that would require all three main parties to comply: joint and several liability notices to tackle sellers’ responsibilities, the Fulfilment House Due Diligence Scheme and split payments on the consumer.28 However, HMRC, contrary to the views of Professor de la Feria, informed us that it does not yet have all the powers that it needs to tackle the problem.29 HMRC is exploring further options for tackling online VAT fraud, such as the split payments method for collecting VAT. Under this method, a financial intermediary, such as a bank or the online marketplace, would have to deduct the VAT before paying the sale proceeds to the non-EU seller, with the intermediary then being responsible for paying the VAT element to HMRC. HMRC is analysing the evidence from its consultation on split payments but told us that, under current EU law, it cannot implement the measure.30

12.HMRC assured us that it welcomes intelligence about potential online VAT fraud, such as that from our mystery shopping exercise and from other sources, and that it investigates every case. It takes HMRC at least 25 days from the point of receiving intellegence from an informant to be able to issue a joint and several liability notice as the Department will need to carry out an investigation to establish whether there is a case of non-compliance.31 HMRC informed us that, by the end of July 2017, it had received 1,187 pieces of intelligence from organisations like RAVAS and VATfraud.org, of which fewer than three in five had identified potential non-compliant sellers.32 We asked HMRC why, even in the absence of prosecutions, it does not name and shame sellers who evade VAT. HMRC responded that it has the powers to name deliberate defaulters but certain criteria, as set by Parliament, have to be met about who can be named. HMRC also questioned the effectiveness of naming and shaming in cases of online VAT fraud.33

Online marketplaces

13.Amazon and eBay are two of the largest and most well-known online marketplaces in the UK, though there are many others. RAVAS told us that it is inconceivable that online marketplaces are not aware of the fraudulent activities that take place on their platforms.34 We questioned Amazon and eBay as to whether they have been, for a long time, ignoring the problem of online VAT fraud. Both told us that they take this problem very seriously as it creates legal, financial and reputational risks to them. Amazon and eBay told us they have accordingly dedicated a lot of resources to tackle this problem to ensure all ‘bad actors’ are removed from their platforms. They told us that they work closely with HMRC, blocking sellers from their platforms when they receive notifications from HMRC that sellers have broken the law.35 eBay told us it has received 77 notices from HMRC to date and blocked 184 sellers. In addition, eBay claimed it had taken action against a further 1,077 sellers in the past few years. Amazon told us that, of its 46,000 non-EU sellers, it had received more than 400 notices from HMRC to take down sellers and that it acted within 24 hours to do so.36

14.eBay was keen to emphasise that its internal checks go above and beyond the legal requirements. For example, eBay claimed it requires all foreign sellers to display a VAT number, validates these numbers via reference to the VIES system (the European Commission VAT database) and links the various accounts of non-compliant sellers to capture all their activities.37 Amazon explained to us that it believes the majority of sellers want to be compliant while there will always be a minority who will break the law intentionally. Amazon told us that it provides the first group with extensive educational tools and other initiatives, such as a ‘technology tool’ which makes it easier to comply with the tax laws. To tackle the intentional rule-breakers, Amazon told us that it has so far shared information with HMRC on all of its non-EU sellers who made a sale in 2016 to enable further investigation and that it will provide HMRC with the equivalent data on 2017 sales for those same sellers, as well as for new non-EU sellers who have made a sale since the end of 2016.38 Amazon maintained that it has processes in place, such as checking IP and legal addresses, to prevent fraudulent sellers that have been removed from its platform re-emerging under the banner of another company.39 Amazon claimed it has detected and prevented 37 attempts to re-register, out of the 433 sellers whose accounts it had blocked following receipt of joint and several liability notices from HMRC.40 Amazon and eBay told us that they plan to introduce further technological enhancements and solutions, over the next six months, to enable them to scale up their activities and provide more powerful tools to detect and prevent online VAT fraud and error.41 Amazon told us that, in terms of VAT registration numbers, its policy until the last six or nine months had not been to actively collect VAT registration numbers, and that having a VAT number for a non-EU seller with stock held at its warehouse “is not a data point that we necessarily think is that critical”.42

15.Following our evidence session in September, RAVAS and VATfraud.org made a written submission to us taking issue with some of the statements made during the session. The submission made a number of points, including:

that there is no reason why online marketplaces cannot ensure there is a valid VAT number showing for any non-EU seller with UK stock;
that online marketplaces’ failure to do simple checks is exacerbated by poor enforcement of existing rules by HMRC;
claims that in practice eBay do not properly verify VAT numbers of traders;
disputing Amazon’s claim to us that it is not part of the supply chain; and
that HMRC had been insufficiently proactive in enforcement and shown apparent leniency towards Amazon and eBay.

16.We have published the full submission from RAVAS and VATfraud.org alongside this report.43

17.In terms of doing more to address online VAT fraud, Amazon and eBay told us that, irrespective of the extent of any checks they carry out, HMRC input would be needed to fully establish non-compliance, which is why data sharing is so effective.44 HMRC has sought both aggregate data, to gauge the extent of VAT evasion on the sites generally, and information regarding particular businesses.45 The Department confirmed the usefulness of the data that the marketplaces were sharing, which Amazon, for example, told us it supplied monthly in an agreed format that is helpful for investigations.46 HMRC told us that it wanted to see the kind of routine flow of data provided to it as described by Amazon, but also expressed reservations about how well this was working in practice. HMRC stressed that there was not yet complete data transparency from the marketplaces, and highlighted that sometimes online marketplaces would argue that data HMRC wanted should not be supplied because it was not held within HMRC’s UK jurisdiction. HMRC told us that it would not agree with such arguments, but nevertheless did encounter them. HMRC said that it expected co-operation and for data to be supplied voluntarily, but if this was not the case then it would exercise its statutory powers and issue notices accordingly.47 In the meantime, online marketplaces, through their relationships with sellers and the commissions that they charge on transactions, continue to profit from fraudulent activities. Amazon, for example, organises regular presentations at Chinese trade fairs to recruit overseas sellers, has plans to buy a shipping company and fulfils orders and handles payments, which all suggest a very embedded relationship with the seller. Amazon was keen to stress that its focus was on not having ‘bad actors’ using its platform, so that there was a level playing field on which all sellers competed equally. After repeated questioning, Amazon confirmed however that when one of its sellers does not pay the VAT due, it still receives its commission on sales.48

1 C&AG’s Report, Investigation into overseas sellers failing to charge VAT on online sales, Session 2016–17, HC 1129, 19 April 2017

2 C&AG’s Report, paras 1, 2 (page 4)

3 C&AG’s Report, paras 3, 4 (page 4)

4 C&AG’s Report, para 5 (page 5), para 1 (page 6)

5 Committee of Public Accounts, Tackling Tax Fraud, 34th Report of Session 2015–16, HC 674, April 2016

6 C&AG’s Report, para 8 (page 8)

7 Qq 1–2, 29, 78, 131; C&AG’s Report, para 1 (page 6)

8 Q 112; C&AG’s Report, para 1.20

9 Q 2; C&AG’s Report, para 1.22

10 Qq 1, 3, 19–20

11 Qq 133, 137

12 Q 2