Here’s Why Amazon and EBay Are the U.K.’s New Tax Fraud Police

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By Ben Stupples

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On April 25, the U.K. announced a new effort to fight tax fraud across e-marketplaces, asking businesses such as Amazon.com Inc. and eBay Inc. to commit publicly to tackling the issue among online traders.

The U.K. has asked e-marketplaces to sign an agreement to educate users on value-added tax, provide data to the U.K.’s tax authority, and react swiftly to non-compliance, according to a government news release . The agreement, set to be published with a list of signatories, is a major step in the U.K.’s fight against VAT fraud and marks a shift in large companies’ societal role.

E-marketplaces are in a “unique position” to see how traders are evading tax on their sites, Sue Rathmell, VAT director at accounting firm MHA MacIntyre Hudson, told Bloomberg Tax. “Here, the marketplaces are being asked to police an issue that’s difficult for HMRC to get on top of.”

VAT fraud costs the U.K. as much as 1.5 billion pounds ($2.1 billion) a year. Cracking down on fraud in e-marketplaces has become a priority for the U.K. due to foreign traders skirting the levy on their sales in the country. This evasion hurts U.K. traders’ competitiveness as they must charge the levy.

“It’s unusual, but positive, that the online marketplaces are collaborating with the government,” Robert Marchant, a VAT partner at accounting firm Crowe Clark Whitehill, told Bloomberg Tax. “In a negative way, though, it’s a bit of a slippery slope—where do you draw the line with these businesses, which all have obligations to their own shareholders, helping the authorities?”

21 Percent of Tax Take

Levied on the sale price of goods or services, VAT is a key source of the U.K.’s public finances, making up 21 percent of the 594.3 billion pounds collected by the government in the latest financial year.

Similarly, the U.K. is a key country for online marketplaces. Last year, it was Amazon’s fourth-largest and eBay’s third-largest individual geographical markets, according to their annual reports. Rival business Etsy Inc., meanwhile, lists the U.K. in its own 2017 annual report as a “core” market.

In April 25 emails, spokespeople for Amazon and eBay told Bloomberg Tax they will sign the U.K.’s agreement. They declined to comment further. An Etsy spokeswoman didn’t respond to Bloomberg Tax’s requests for comment on whether the New York-based business will sign the agreement.

The public disclosure of which e-marketplaces have signed the agreement will “put the spotlight” on those that haven’t, Rathmell said.

Overall, the initiative “shows how determined HMRC are to drill down into this area, where there’s a huge tax loss,” she added, citing the U.K.’s tax authority, Her Majesty’s Revenue and Customs.

HMRC’s Past Criticism

HMRC hasn’t always received praise for the way it has dealt with VAT fraud.

Last April, the country’s National Audit Office noted the government had no cohesive strategy by 2013 to respond to the growing threat that overseas online traders posed to the U.K.’s tax take.

Amazon and eBay executives, meanwhile, faced a public grilling from lawmakers in September 2017, with one accusing the companies and the U.K.’s tax authority of “turning a blind eye” to VAT fraud.

Online marketplaces “have not been taking the issue seriously,” the Public Accounts Committee said in the October 2017 report that followed eBay and Amazon appearing before it the previous month.

The U.K.’s tax authority “has been slow to act” with VAT fraud on e-marketplaces, the committee added. HMRC “is playing a game of cat and mouse with companies based outside the U.K.”

E-Commerce Growth

The growth of e-commerce, and the ease for online traders worldwide to sell through sites like eBay, lie at the heart of why online marketplaces are the focus of the U.K.’s VAT fraud debate.

In 2006, online sales accounted for 2 percent of U.K. retail activity, according to a National Audit Office report. A decade later, they made up 14.5 percent, with half coming from e-marketplaces.

This growth has benefited the U.K. economy, but it has left it “open to abuse,” HMRC said in 2016 guidance .

Online marketplaces “have changed the dynamics of trade,” Marchant said. “The world has got smaller. It’s now so much easier for a start-up in country A to sell in countries B, C, and D.”

U.K.'s Fightback Begins

The U.K.’s fight against VAT fraud among online marketplaces truly began two years ago.

In 2016, it made the likes of Amazon and eBay equally liable for the tax evaded by overseas traders.

The following November, the Treasury then said it would make marketplaces liable for VAT of local traders as well after overseas sellers set up U.K. shell companies to avoid the previous legislation.

Lastly, it launched a scheme this month that enforces more compliance measures on warehousing businesses, further targeting the supply chain of online foreign traders to U.K. consumers.

E-marketplaces understand the U.K.’s efforts are about “fairness,” Mel Stride, Treasury financial secretary, told Bloomberg Tax in an exclusive interview , published April 9. They “have a really positive role to play within the economy. But they do pose a particular problem when it comes to VAT.”

2016 Laws Taking Effect

Boosting the U.K.’s efforts on VAT fraud, the 2016 legislation is already showing results for HMRC.

The new laws have resulted in the tax authority sending 1,300 notices of non-compliance to overseas traders using e-marketplaces, HMRC Chief Executive Jon Thompson said in a March 27 letter to the chair of the Public Accounts Committee. In turn, these notices have yielded 120 million pounds, he said.

In the letter, Thompson also noted for the first time that HMRC has been working closely with online marketplaces to agree on a way to improve the U.K.’s compliance efforts over VAT fraud.

“HMRC will publish this agreement in April 2018 and invite online marketplaces to become signatories to it,” he said. “A list of those who have signed will also be published and updated at regular intervals.”

HMRC will remove businesses that fail to keep the required standards, it said April 25.

The U.K.'s tax authority was likely working with eBay and Amazon on the agreement for the past year, Rathmell said.

The sets of 2016 and 2017 legislation “put the online marketplaces under the thumb,” she said. By contrast, though, the new agreement “could be a sign to the world to say this is how businesses can work together with HMRC, making sure that the government is getting the right amount of tax.”

To contact the reporter on this story: Ben Stupples in London at bstupples@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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