Meet Fruugo, the U.K. E-Marketplace Matching Amazon’s Tax Pledges (1)

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Ben Stupples

Anyone browsing the U.K. government’s first list of online marketplaces publicly committed to combating value-added tax fraud will probably recognize two of the three named companies.

Less familiar may be Fruugo.com Ltd., the U.K. e-marketplace listed with Amazon.com Inc. and eBay Inc., which counts past chairmen of Nokia Oyj and Marks & Spencer Group Plc as its investors.

Set up in Finland, Fruugo operates across more than 30 countries and moved its headquarters to Ulverston, north-west England after its current management team acquired the company in 2012.

More recently, signing up to the U.K.’s latest efforts to target VAT fraud among e-marketplaces fitted well with Fruugo’s business strategy, Chief Financial Officer Darren Naylor told Bloomberg Tax.

Her Majesty’s Revenue and Customs, the U.K. tax agency, “called us a while ago, and we said we’re happy to sign up as it’s what we’re trying to do anyway: be whiter than white,” he said in a May 30 interview.

Published May 29, HMRC’s public list citing Amazon, eBay and Fruugo followed its call last month for e-marketplaces to publicly commit to tackling VAT fraud among traders using their online platforms. The move is a milestone in the tax authority’s efforts to work with companies on compliance.

Targeting VAT fraud among online marketplaces has become a priority for HMRC, largely due to foreign traders skirting the levy on their sales to consumers based in the country. In turn, this evasion undercuts U.K. traders and online sellers as they must charge VAT on their sold goods.

“A few years ago they didn’t have much of an idea about how online marketplaces work,” Naylor said about HMRC. The latest move “is definitely a major step forward in a formalized approach.”

U.K. Agreement Details

Specifically, HMRC has asked e-marketplaces to sign up to educating their users on VAT obligations, provide data on traders, and react swiftly to evidence of non-compliance. Any business that fails to uphold the agreement’s standards will be removed from it, according to an April 25 news release.

In addition to Amazon, eBay and Fruugo, Alibaba Group Holding Ltd. said earlier this month it is in talks with HMRC over the agreement. A spokeswoman for Alibaba, China’s largest e-commerce company, didn’t respond to a request for updated comment. A spokeswoman for U.S.-based Etsy Inc., meanwhile, confirmed May 30 that the company is “closely reviewing the agreement internally.”

Amazon, eBay and Fruugo have made a “massive commitment,” Sue Rathmell, accounting firm MHA MacIntyre Hudson’s VAT director, said in a May 30 news release. But “agreement from smaller players is also vital—otherwise sellers could simply hide from HMRC among smaller marketplaces.”

HMRC’s Change of Plan

HMRC’s collaboration with online marketplaces also marks a significant change from five years ago.

Back then, HMRC didn’t have a cohesive plan to deal with the growing threat that overseas traders on e-marketplaces posed to the U.K.’s tax take, the National Audit Office said in an April 2017 report. Overall, VAT fraud from overseas e-marketplace traders costs HMRC as much as 1.5 billion pounds ($2 billion) a year, with most of the problematic traders selling from China, the report added.

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 government’s tax receipts in the latest financial year. The U.K. introduced the tax, currently set at 20 percent, in the early 1970s as part of its membership of the European Union.

Fruugo doesn’t have Chinese retailers among its traders, who only sell new products and total almost 700 in number, Naylor said. HMRC’s agreement will give a chance to help Fruugo’s non-EU retailers, and may even provide a chance for the company to bolster its business, he added.

“VAT can often be seen as a barrier to market entry for non-EU retailers, particularly with U.S. companies,” he said. “We have a good relationship with our retailers, and the agreement gives us a chance to add to the services we currently provide by allowing us to point our retailers in the right direction of advisers who can help them with VAT regulations, and even solve potential issues.”

‘It’s Still Early Days’

In a May 29 statement, HMRC praised the commitment shown so far from the likes of Fruugo and Amazon, and encouraged other online marketplaces active in the U.K. to follow their example.

“It’s still early days, and I think the situation will evolve and other marketplaces will eventually sign up to the agreement,” Naylor said. “I can imagine the agreement would be far more onerous for companies that, unlike us, have individual sellers and one-man bands. For us, it’s been easier.”

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

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax