The huge and rapid growth in online marketplaces has led to a similar growth in overseas sellers using these marketplaces to sell goods to customers in the U.K. without registering for VAT. These sellers can then undercut U.K. businesses which correctly register for VAT and then have to increase their prices to account for VAT on sales. The problem for HM Revenue & Customs (“HMRC”) has been that overseas sellers come and go, and as soon as they are identified by HMRC, they disappear and return in another guise
Nevertheless, HMRC has been working hard to control this area of VAT evasion and make the market fairer for U.K. businesses. In doing so, it has revolutionized the responsibilities of certain taxpayers by tasking online marketplaces to hunt for tax evaders on its behalf.
The Business Background
Gone are the days when a business opened a shop, bought stock and sold it to people on the premises. The tax authorities could see the sellers, identify them, register them and collect the tax on the sales. The internet has meant that anyone can sell anything anywhere, to a customer in any country in the world, from a base anywhere in the world. This has led to the U.K. market being flooded with cheap, sometimes fraudulent, online goods offered by overseas sellers happy to avoid paying tax. The tax authorities can't physically see these sellers and trace them and therefore it has been difficult to collect the VAT.
HMRC realized that it needed to make significant changes to the way it dealt with these businesses or there would continue to be a huge loss of tax.
The VAT Background
HMRC defines an overseas seller as a person or business that sells goods stored in the U.K. to U.K. consumers without having a business establishment in the U.K. The definition also includes businesses based outside the European Union (“EU”) that sell goods to a U.K. consumer and then import the goods into the U.K
The U.K.’s VAT registration rules state that a U.K. seller has to register when their business sales exceed 85,000 pounds per year. This is the general VAT registration threshold applicable to U.K. businesses. It is different for a non-U.K. seller that sells goods into the U.K. from a stock in another EU country. These sellers must register for VAT under the “distance selling” rules when sales to U.K. customers exceed 70,000 pounds per year. For overseas sellers selling goods which are in the U.K. at the time of the sale, there is no registration threshold at all. This means that all such sellers must be registered for VAT at or before their very first sale.
One Billion Pound Loss to the Treasury
However it became clear to HMRC that these rules weren't working because overseas sellers weren't registering for VAT according to the rules. HMRC estimated that the cost to the Treasury was around 1 billion pounds a year. In 2016, to deal with the problem, HMRC introduced new rules which held online marketplaces liable for VAT unpaid by U.K. sellers. HMRC was also able to force overseas sellers to appoint a U.K. VAT representative or to provide a financial bond. If the overseas seller still failed to comply then the online marketplace used to sell their goods could be held jointly liable for the VAT.
This was a massive shift towards forcing online marketplaces to monitor and police their sellers and it led to a ten-fold increase in VAT registration applications from overseas sellers in 2016. This was a good result but it wasn't the end of HMRC's attempts to put overseas sellers on a level playing field and subject them to the same VAT liabilities as U.K. sellers.
Further Powers for HMRC
In the Autumn Budget of 2017 HMRC introduced wider ranging powers including joint and several liability for online marketplaces for overseas sellers' VAT liability. It also required sellers to show their VAT registration numbers on the online marketplaces they used. Online marketplaces had to carry out due diligence on new sellers setting up accounts with them, including checking their VAT registration number, the location of the seller and their goods and whether the seller had previously been removed from their marketplace. In addition, the marketplace must report to HMRC when they remove a seller who hasn't met their VAT obligations from their marketplace.
At the same time, HMRC also tasked U.K. fulfillment houses and warehouses, used by overseas sellers to distribute their goods, with ensuring VAT was properly paid by overseas sellers. Existing warehouses have to register for a new due diligence scheme by June 30, 2018 and new warehouses have until September 30, 2018 to register. Businesses that fail to register under the scheme will, from April 2019, receive a 10,000-pound penalty, a criminal conviction and their right to trade in the U.K. revoked. Serious stuff.
Larger fulfillment houses like Amazon have already implemented checks on their sellers, but the rules will apply to all fulfillment houses and warehouses regardless of their size. All of them must carry out checks on all the customers they trade with, gathering information and documenting VAT numbers to enable them to demonstrate compliance, and implementing a separate system for registering new customers. They have less than a year to get ready.
HMRC's Next Steps
HMRC therefore has the marketplaces and the warehouses working for it in the hunt for tax evaders; but not content with this, it has recently proposed further responsibilities for online marketplaces.
At the end of April 2018, HMRC released the text of an agreement it hopes online marketplaces will sign up to in order to show their commitment to tackling VAT evasion. The agreement aims to strengthen the responsibilities of online marketplaces to police overseas sellers, stating ‘There is now a public and parliamentary expectation on online marketplaces to play a wider role in ensuring their users are compliant with the tax rules.'
The agreement looks to generate a collaborative relationship between HMRC and online marketplaces to promote VAT compliance. There are new legal obligations requiring marketplaces to provide data to HMRC which will allow HMRC to identify individual sellers, calculate the value and volume of their U.K. sales and contact them.
In addition online marketplaces agree to ensure that sellers are told about their legal obligations and, if they continue to be non-compliant, marketplaces must restrict or remove their ability to sell.
HMRC has said it will publish the names of the marketplaces which sign up to the agreement and that if they do not comply with the agreement, it will remove them from the list. The list will be published regularly.
Is Self-policing the New Way Forward?
As a VAT specialist with some 25 years' experience, I don't think I've ever seen an agreement like this before. Online marketplaces will police overseas sellers on behalf of HMRC and report to HMRC if sellers fail to comply with U.K. VAT law. More than that though—marketplaces will be shamed if they don't agree to do it.
This agreement shows the extent to which public attitudes to tax avoidance and evasion have changed in the U.K. in the last 20 or so years. There used to be a prevailing view that encouraged the avoidance of tax, along the lines of “pay as little as you possibly can,” but now people are far more inclined to feel that companies should pay the right amount of tax. The public increasingly expects businesses to show much greater corporate social responsibility in their activities. Moreover, we can monitor and check that businesses are doing what they claim to be doing far more easily; for example, larger businesses have to publish their tax policy for public scrutiny.
Parliament is right to give HMRC the powers it needs to tackle businesses which are still working on the formula of “pay as little as you possibly can” and HMRC is correct to share the responsibility with businesses which are in the right position to help it collect the tax.
So, will we see more of these kinds of agreement in different areas of business in the future? I think we will. U.K. businesses which have been cheated out of sales by overseas sellers who have avoided paying U.K. tax in the past will certainly welcome these moves as a step towards a level playing field.
By Sue Rathmell, VAT Director with MHA MacIntyre Hudson, U.K.
She may be contacted at: email@example.com
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