The NAO’s rather ambitious stated vision is to “help the nation spend wisely. Our public audit perspective helps Parliament hold 
government to account and improve public services.” and it’s with this in mind that they recently took a look at how HMRC deals with overseas sellers who fail to charge VAT on online sales.
Last year online sales accounted for 14.5% of all UK retail sales and included all types of online shopping, including food and goods from major UK retailers. However just over half of these sales were from non-store sales, mainly through online marketplaces, like well-known platforms such as eBay, Not on the High Street and Amazon, where buyers and sellers can meet and transact.
For many small online sellers based in the UK VAT is not an issue as they operate well below the £85,000 registration threshold. However online sales attract VAT in the same way as goods bought in person.
The VAT rules require that all traders based outside the European Union (EU) selling goods online to customers in the UK should charge VAT, if their goods are already in the UK at the point of sale. In these cases, sellers should pay import VAT and customs duties when the goods are imported, based on their value, and charge their customers VAT on the final sale price. The sellers should also be registered with HMRC, and are required to submit regular VAT returns. The sellers must also account to HMRC for the VAT charged to customers, reclaiming any eligible import VAT through their VAT return.
This NAO investigation specifically looked at the issue that some sellers from outside the EU who bring goods into the UK and store them in fulfilment houses, before selling them online to UK customers, are not charging VAT on those online sales. This may be due to deliberate fraud, a mistake, or because they do not understand the rules. They didn’t look at other types of VAT fraud or error, such as the non-collection or under-collection of import VAT or customs duties at the border when goods enter the UK.
HMRC’s estimate of a loss of between £1bn and £1.5bn in tax revenue in 2015-16 is described by the NAO as ‘subject to a high level of uncertainty’. This estimate represents between 8% and 12% of the total VAT tax gap of £12.2bn for the year, however the NAO says UK trader groups believe the problem is widespread, with some of the biggest online sellers of particular products, such as mobile phone accessories, not charging VAT.
Back in 2014 HMRC did identify online VAT fraud and error as one of its key risks in and began to increase resources in this area in 2015. Despite this the NAO is critical of HMRC’s efforts saying it was slow to react and that the penalties don’t act as a deterrent as they aren’t of sufficient severity.
One of the main problems HMRC has with enforcing the regulations is that they’re not certain how many fulfilment houses there are in the UK, they currently estimate the number at between 500 and 3,000.
To date, there have been no prosecutions for online VAT fraud but HMRC has carried out many civil operations, including 279 investigations of businesses and 373 compliance interventions in 2016-17.
From September last year HMRC was given new joint and several liability powers to hold online marketplaces liable for non-payment of VAT. HMRC has been testing these powers on 200 high-risk sellers and has issued 27 pre-notifications and 37 full notices whcih they hope will have a wide deterrent effect and plans to increase the scale of its activities significantly from April 2017.
It’ll be interesting to see whether HMRC is able to bring down the tax gap based on this renewed focus on VAT compliance by online traders.
VAT is, as we always say, surprisingly complicated. Our VAT experts can advise when it comes to applying VAT within a business or charity. Get in touch to discuss how we could work with you or read more of our blogs on VAT here.
