The UK is losing billions of pounds in revenues each year from online VAT fraud committed by foreign traders. But with Amazon and eBay profiting from the fraudsters, and HMRC not doing enough to tackle the problem, is collaboration or conviction the better solution?
18 October 2017
The UK Public Accounts Committee (PAC), the parliamentary spending watchdog, has accused online marketplaces including Amazon and eBay of not taking the issue of VAT fraud seriously in a report published today. It also said HMRC has been slow to act on the issue, describing the tax authority of "playing a game of cat and mouse" with foreign sellers UK.
"Online VAT fraud is hugely damaging yet, as online sales continue to grow, the response of HMRC and the marketplaces where fraudsters operate has been dismal," said PAC Chair Meg Hillier.
"Online marketplaces tell us they are committed to removing 'bad actors', yet that sentiment rings hollow when those same marketplaces continue to profit from the actions of rogue traders," she said, adding that "HMRC needs to be far tougher in protecting the interests of British businesses and taxpayers. As a priority it must inject more urgency into enforcement action. But it should also push the case for further new powers".
The PAC says Amazon and eBay are profiting from the VAT fraud taking place via its websites. This refers to foreign traders outside the EU selling to UK customers via warehouses or "fulfilment centres" physically based in the UK, but not charging the 20% VAT on the sales.
In some cases, these fraudulent traders are not displaying VAT numbers, are not VAT registered, or are displaying the VAT numbers of other UK businesses to suggest they are compliant. When the fraud occurs, Amazon and eBay continue to earn commission on the sales. Moreover, these overseas competitors are able to undercut the retail prices charged by UK businesses on the same products by 20% by not charging VAT. The committee said these businesses are therefore profiting from people who are defrauding the British taxpayer in a time when the UK is struggling and Brexit looms.
The PAC also slammed the UK’s tax authority, HMRC, for failing to use its new powers – joint and several liability, the fulfilment house due diligence scheme and the split payments method of collecting VAT, introduced in the Finance Act 2016 – to tackle the problem. "HMRC has not named and shamed non-compliant traders and so far has not prosecuted a single seller for committing online VAT fraud," the report said, calling for more urgency in tackling the issue.
Moreover, it said HMRC figures that estimated tax losses of £1 billion to £1.5 billion ($1.3 billion to $1.98 billion) in 2015-16 from online VAT fraud are "out of date and flawed". It cited the National Audit Office and the Office for Budget Responsibility that both reported that HMRC’s estimate was subject to a "high level of uncertainty".
Online sales are continuing to increase. In 2006, only 2% of all UK retail sales were being made online, but this rose to 14.5% in 2016. Despite this, HMRC has no plans to update its estimate of the tax lost from online VAT fraud to provide a better indication of the scale of the problem.
According to the European Commission’s VAT gap study, the UK’s VAT gap – the difference between expected VAT revenues and the actual VAT take – was 11% (£16 billion) in 2015, up from 9% in 2011.
Part of the problem that has led to the huge amount of VAT fraud is the structures – or lack of them – that companies have in place. Moreover, the tax authority has not made the necessary efforts to clampdown on the fraud.
During evidence sessions, Amazon told the committee that it had only started collecting VAT numbers from non-EU sellers six months ago and that knowing whether a non-EU seller has a valid VAT number is not a critical data point.
As of July 1 2017, Amazon had VAT numbers for 38% of the 21,536 non-EU sellers using products in the company’s UK warehouses to fulfil the order. In addition, it held VAT numbers for 494 non-EU sellers who use their own delivery methods.
eBay Vice President Joe Billante told the committee that foreign sellers we required to display a valid VAT number that is checked through its VAT information exchange system. And he further informed the committee that eBay were told by HMRC that there was no legal obligation to display a VAT number. But the Retailers Against VAT Avoidance Schemes (RAVAS) said it had found several examples of traders operating on eBay with no VAT number, traders with invalid VAT numbers and even VAT numbers appropriated from other traders.
Nevertheless, Amazon and eBay have said they plan, over the next six months, to increase their technological capacity and that they saw data-sharing as an effective way to tackle the VAT problem.
On HMRC’s side, RAVAS claimed that the tax authority has been using its website to find VAT fraudsters.
"The situation at the moment is that the bulk of the fraud is still occurring. HMRC have done something, but not much, and virtually everything they have done has been reliant on VATfraud.org – we looked at the analytics and HMRC are using it every day," Richard Allen, RAVAS co-founder told International Tax Review. "So we noticed a correlation between people who were being listed on there and people who were being taken down. So, we are in this bizarre situation where we’ve been doing all the work and HMRC have been taking the credit for it. It’s just ridiculous."
Moreover, Allen said HMRC has failed to make test purchases from suspected VAT fraudsters to find the culprits, which is one of the simplest detection methods. "HMRC seems to have one leg tied behind their back, or even two when it comes to dealing with that."
Collaboration could offer a solution
The PAC has suggested HMRC and online marketplaces should do more to work together to tackle the problem.
It said HMRC should establish collaborative working arrangements under an agreement by March 2018. These arrangements would outline cooperation, data sharing and expectations of a prompt response to evidence of non-compliance, as well as 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," the committee said.
This would resolve HMRC’s compliant during the evidence sessions where it said that 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. Moreover, it claimed to have faced resistance from online marketplaces in sharing data that are not held within the UK’s jurisdiction.
However, this statement clashes with HMRC Executive Chairman Edward Troup’s recent speech on the topic where he warned businesses that HMRC’s crackdown on internet platforms is just the "tip of the iceberg".
Speaking at Professional Fee Protection’s Tax Investigations Conference in London on October 13, Troup said HMRC has launched investigations into more than 2,500 internet retailers it suspects of not paying the right amount of VAT. He said new powers have made it easier for HMRC to force internet platforms, including Amazon and eBay, to hand over data that would help identify tax-evading small businesses that trade through the platforms. Payment providers, such as PayPal, are another new source of data.
But Allen said the online giants should do more in tackling the problem. "It is easy to verify a VAT number. So Amazon and eBay could quite simply automate the process so that when you sign up to Amazon or eBay, you put in a VAT number and your address and it’s automatically checked on the EU website, and if it doesn’t match, you don’t get an account."
He further suggested that designing software for this facility should be an easy task for these internet retailers. "In fact, a friend of mine who worked in IT said he could write a piece of software in 10 minutes that could do this."
Prosecution "the only thing that will sort this out"
Allen suggested that VAT fraud of this kind could be treated the same way as handling stolen goods.
"If it’s for stolen goods and you were to turn around to the police and say: 'I’m just an independent third party handling these transactions and I have no knowledge of the crime’, it would not wash at all because if you look up the definition of handling stolen goods, it’s all-encompassing. The same applies here," Allen said.
He said it is astonishing that companies like Amazon and eBay can claim no liability for the fraud when they know their company is handling stock that is in the UK, but is being sold via a non-EU seller who is not VAT registered or displaying a valid VAT number, and has made no effort to verify the seller for VAT purposes.
"The problem here is that nobody has actually prosecuted Amazon or eBay. I think [prosecution] is the only thing that will sort this out. The only thing that will stop this from happening is executives of Amazon or eBay going to jail. Then they will have an incentive for not allowing it," Allen said.
Although he believes collaboration is good, he said it should mean collaboration on the same way as stolen goods. "Collaborative in the sense that the onus is on you to make sure you have done what you need to do to make sure you’re not implicated."
Although collaboration would be a peaceful solution to the problem, there is a major risk to Amazon and eBay’s is reputations if they continue to profit from VAT fraudsters. The companies claim it is HMRC’s duty to find the fraudster, not theirs.
With Brexit looming, and the uncertainty over trading and customs rules growing, the issue of VAT fraud is only going to get more complicated. Collaboration could provide a good solution, but voluntary collaboration may not provide to get results HMRC. If compliance becomes mandatory, and legal sanctions or even imprisonment is imposed, it could help clamp down on VAT fraud swiftly.
The above article was published on www.internationaltaxreview.com on October 18 2017 and has been republished with the approval of the Publisher.