Tackling online VAT fraud and error Contents

2New measures and future risks

HMRC’s new powers

18.A number of new measures against online VAT fraud were included in the Finance Act 2016, principally joint and several liability for online marketplaces, which took effect in September 2016, and the Fulfilment House Due Diligence Scheme.49 Professor de la Feria told us that, while it is possible that some sellers who have been identified by HM Revenue & Customs (HMRC) as non-compliant, under the joint and several liability legislation, may start using other less well known online marketplaces, most consumers will continue to purchase goods from major platforms such as Amazon and eBay. The new measure should therefore still be effective in tackling a significant proportion of fraud that takes place on the major platforms and its impact should become apparent within a year of its introduction.50 Retailers Against VAT Abuse Schemes (RAVAS) was more sceptical regarding the effectiveness of the joint and several liability powers. Its representative told us that, in practice, it believed online marketplaces would never be held liable for any evaded VAT as they would always remove non-compliant sellers within the 30-day window they have to take action, after receiving a notification from HMRC.51

19.In terms of the impact of the new measures, HMRC told us that the new measures were clearly having an effect, particularly the joint and several liability notices. The number of overseas online sellers registered for VAT had increased from 700 at the end of 2015 to 17,537 at the end of August 2017. The Department had also issued 399 joint and several liability notices and all those sellers had been removed from the online platforms.52 HMRC is not yet aware what proportion of the recently VAT registered sellers had been trading in the past or whether they will be compliant in the future. We asked HMRC what it was doing to check the newly registered traders declared and paid over any previously unpaid VAT. The Department told us that it is monitoring and tracking the behaviour of the recently registered sellers to ensure that they submit their returns and make payments including historical liabilities, interest and penalties. We asked HMRC how many years it could go back. HMRC told us that it would depend on the nature of the non-compliance but, if fraud could be shown, then it could go back up to 20 years.53 HMRC told us that in the 2017 calendar year it will collect £50 million more VAT from the recently registered sellers. While this is a small amount of additional revenue compared to the total size of the problem, HMRC explained that it also collects revenue from other approaches, such as from those sellers it forces to register and from the enforcement operations of its National Imports Taskforce.54

20.HMRC has not yet been able to assess how much of the online VAT losses are due to lack of awareness, error or deliberate fraud.55 It expects the measures that came into effect in 2016 to reduce the online VAT fraud and error tax gap by a third to a quarter but stressed it would need further powers to reduce the gap further. HMRC has estimated the 2016 measures will generate a total revenue of around £875 million by 2020–21 and around £350 million a year after that.56 HMRC did not provide a specific date when it would assess the effectiveness of the new powers, or a target reduction, but told us that it would evaluate whether it achieved its forecast yield.57

Fulfilment houses

21.The use of fulfilment houses in the UK, warehouses where goods can be stored before delivery to customers, makes it easier for overseas sellers not to charge VAT while enabling them to provide next-day deliveries to their customers. This is, as RAVAS told us, what every customer nowadays expects.58 If businesses sell goods located in the UK they must register for VAT in the UK, charge VAT to their UK customers and pay the appropriate amount of import VAT when the goods enter the UK.59 RAVAS told us it believed the huge volumes of Chinese goods stored in UK fulfilment houses were a major problem in relation to online VAT fraud.60 Some online marketplaces, such as Amazon, also own and operate their own fulfilment houses.61

22.HMRC will introduce the Fulfilment House Due Diligence Scheme (FHDDS) in April 2018. The Department explained to us that under this scheme all fulfilment houses will have to register, go through a ‘proper person test’ and check that any overseas sellers storing goods are VAT registered.62 HMRC told us it is confident that it will be able to implement the scheme.63

23.Although it plans to create a register of fulfilment houses under the new scheme, at the moment HMRC told us it is uncertain how many fulfilment houses there are in the UK. HMRC has estimated the number at between 500 and 3,000.64 HMRC told us that its estimate of 500 is based on strong evidence and that it has identified an additional 2,500 businesses in the UK that ‘look like fulfilment houses’. The onus for registration will be on the fulfilment houses if they wish to continue to operate. We suggested that overseas sellers who register for VAT should also provide HMRC with a list of the UK fulfilment houses they use. HMRC agreed that this was a good idea and that it will consider it.65

Exiting the European Union

24.The UK’s exit from the European Union (EU) will have significant implications for individual businesses and taxpayers in general.66 We asked Professor de la Feria about the risks that the UK’s exit from the EU may pose to the specific problem of online VAT fraud. Professor de la Feria explained that the weaknesses that already exist at the UK border, as highlighted in the 2016 OLAF report for example, will be harder to deal with once the UK leaves the EU. As a result, Professor de la Feria expected HMRC to require, for example, more resources, more staff and better IT systems to deal with the increased risks. Enforcement at the borders will remain a necessity even with all the other measures in place to tackle the problem of online VAT fraud (joint and several liability of online marketplaces, the Fulfilment House Due Diligence Scheme and split payments).67

25.HMRC told us that the government, in relation to the UK’s exit from the EU, will need to balance three considerations: security of the UK, raising of revenue and free flow of trade. HMRC has identified four areas where the UK’s exit from the EU will significantly affect it: customs, indirect taxes (particularly VAT), data sharing arrangements with other EU member states and the implications for residency laws and benefits.68

26.HMRC told us that it has made significant progress on customs-related issues, including the underpinning technology, the Customs Declaration Service. HMRC accepted that there are scenarios in which additional staff may be required. HMRC told us it was confident that it could complete any changes necessary to the customs system within the timeframe agreed to in the current negotiations. However, HMRC pointed out that one of the challenges of determing the effect on online VAT fraud was the uncertainty in the timing and terms of the UK’s exit.69

27.HMRC told us that it has confidence in its internal processes to identify potential new areas of fraud and risk. HMRC told us it has a team which looks at future developments that will affect its administration of tax and a risk intelligence directorate which identifies the key strategic risks. These are collated in HMRC’s ‘Strategic Picture of Risk’ which prompts HMRC to take appropriate actions to address the identified risks. It was in 2014 that this exercise identified that non-EU sellers using online marketplaces were driving an increasing part of the VAT gap. This then prompted HMRC to seek new measures to tackle online VAT fraud.70

49 Q 17; C&AG’s Report, para 3.3

51 Q 9, C&AG’s Report, figure 11

55 C&AG’s Report, para 4 (page 7)

58 Q 9; C&AG’s Report, paras 1.9 and 1.11

59 C&AG’s Report, para 1.4

62 Q 42; C&AG’s Report, para 3.16

64 Q 119; C&AG’s Report, para 6 (page 8)

17 October 2017