Officials are preparing for an uptick in VAT compliance problems as the UK leaves the European Union. Online platforms like Amazon Marketplace and eBay are already under pressure to make sellers pay their share of tax, but the authorities are struggling to cope as the scale of non-compliance grows.
Ruth Corkin of tax advisers Hillier Hopkins LLP warned that “Businesses will be facing a tax headache in the event of a no-deal Brexit, as the UK becomes a third country for VAT purposes, and businesses have to account for import VAT on goods.”
The National Audit Office estimated in 2017 that the taxpayer loses between £1-1.5 billion to VAT non-compliance through e-commerce, but industry experts warn that this is a ‘very conservative estimate’. This summer, UK Parliamentarians raised the issue with ministers with questions from Faisal Rashid MP and Lord Tim Clement-Jones revealing that overseas sellers contributed to approximately 60% of the tax loss from VAT fraud and error on online marketplaces. HM Revenue and Customs have issued VAT penalties to a total of 1,059 overseas sellers, issuing penalties worth over £34 million.
Researchers at Copenhagen Economics found in 2016 that 65% of e-commerce consignments sent to the EU from outside were non-compliant. That means that more than half of all parcels arriving in the EU from marketplaces like eBay and Amazon Marketplace are failing to pay the correct amount of VAT.
Experts say that HRMC has work to do to address the problem. Richard Asquith, VP for global tax at Avalara, the software used for automated tax compliance, said “The way to reduce errors, omissions and fraud in VAT is to make it easier for firms to comply. HMRC needs to speed up its programme to make tax digital, making it easier to register for a VAT number and create a digital system for reporting transactions rather than filling out a VAT return.” Corkin adds, “HMRC are working to simplify tax reporting and to move it online, but cliff edge changes like this make it harder to distinguish between businesses trying to do the right thing and businesses engaged in tax fraud.”
The UK was among the first to legislate on the issue in 2017, but since then other member states have gone further. “HMRC acted in 2017 to make marketplaces like eBay and Amazon validate the transactions on their platforms,” notes Asquith, “Germany does much more to make the marketplaces responsible, and after Brexit, the UK could look like a soft touch for non-compliance.”
Corkin argues the measures could be extended to other players in e-commerce, saying the 2017 changes led to “Amazon and eBay deleting a huge number of non-compliant stores. Extending this responsibility to freight forwarding agents, who already check that shipments are properly documented, would put the experts in charge and would improve compliance.”
Other measures could make it easier for companies to comply. “A single ‘catch-up’ return would help firms that have not complied in the past to pay the VAT they owe from previous years” Asquith adds. “Payment providers like PayPal and the credit card companies could be made responsible for calculating and charging VAT on behalf of sellers. HMRC could also work with other countries, regardless of Brexit, to make it more straightforward to register for and report VAT across borders.”
Excluding sellers from the UK and the EU, online marketplaces are dominated by sellers from China, who can offer cheaper prices to UK consumers, but may not be complying with tax obligations. In June 2017, Amazon proactively removed thousands of Chinese sellers from its platform, as part of its deal with HRMC to validate transactions.
The problem persists, however, and the website VATFRAUD.org highlights a large number of Chinese sellers operating with dissolved companies or using VAT numbers not registered in their name. Amazon seller ShineVGift Industry Co Limited, for example, displays a VAT number that is registered to a different company (258210124). AresparkDirect EU, another Amazon seller, is, in fact, a company based in Shenzhen, China, which declines to display a UK VAT number.
Fujian Zongteng Co Ltd, a Chinese e-commerce company, has had two connected companies in the UK struck off Companies House register, TMart UK and UK Elogistics, but continues to operate through a third UK company, Super Smart Services, whose financial statements suggest it may be trading while insolvent.
MPs have pledged to investigate this issue when Parliament next sits and will be asking questions about these companies as well as calling for experts to give evidence. As the UK edges towards its Brexit deadline, businesses and governments can add VAT compliance to their long list of areas to worry about.