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HMRC has been too slow to address the problems of online VAT fraud by overseas sellers and its estimates of the tax loss are ‘out of date and flawed’ according to a report from the public accounts committee (PAC), which says the current uncertainty over the terms of the UK’s withdrawal from the EU risks making the problems worse.
The committee says online marketplaces have not been taking the issue of VAT fraud seriously, and calls on HMRC to be tougher on such marketplaces which in many cases sell goods via warehouses or ‘fulfilment centres’ physically based in the UK.
The PAC inquiry found HMRC does not know how many fulfilment houses there are in the UK, estimating the number to be somewhere between 500 and 3,000. The fulfilment house due diligence scheme, due to come into effect in April 2018, will require fulfilment houses to register with HMRC.
The report notes: ‘However, it is not clear how HMRC plans to enforce this requirement. HMRC was receptive to our suggestion that it would make sense to require overseas sellers registering for VAT to specify which fulfilment houses they work with.’
The committee believes HMRC and online marketplaces should do more to work together to tackle the problem and urges HMRC to put in place by March next year an agreement setting out collaborative working arrangements, ‘including details of co-operation, data sharing and expectations of a prompt response to evidence of non-compliance’.
The report states: ‘This should include a requirement for all online marketplaces to ensure that a valid VAT number is showing for any non-EU trader selling goods to customers in the UK, where those goods are already in the UK. In the absence of a legal requirement to do so we would expect online marketplaces to implement this measure voluntarily.’
HMRC estimates the loss from online VAT fraud at between £1bn and £1.5bn in 2015–16, but the committee concludes this is ‘out of date and flawed’.
The report states: ‘HMRC should, by March 2018, produce an update of its estimate of the scale and impact of the online VAT fraud tax gap, incorporating new evidence and assessments of new risks where applicable. It should also consider the impacts on legitimate business and wider impact on the economy such as job losses when a business is struggling.’
The committee said HMRC has been too cautious in using new powers, highlighting that the authority ‘has not named and shamed non-compliant traders and so far has not prosecuted a single seller for committing online VAT fraud’.
Recommendations include making much stronger and more extensive use of HMRC’s existing powers, especially third party liability; speeding up the introduction of new measures, such as the split payment method of collecting VAT.
In particular, PAC said HMRC needs to focus on ensuring the marketplace platforms are liable for VAT evasion. One option would be for HMRC to require online marketplaces to withhold VAT when a sale is made and then pass it directly to HMRC.
Meg Hillier, chair of the PAC, said: ‘Online VAT fraud is hugely damaging yet, as online sales continue to grow, the response of HMRC and the marketplaces where fraudsters operate has been dismal.
‘HMRC needs to be far tougher in protecting the interests of British businesses and taxpayers. As a priority it must inject more urgency into enforcement action. But it should also push the case for further new powers.
‘Online marketplaces tell us they are committed to removing “bad actors” yet that sentiment rings hollow when those same marketplaces continue to profit from the actions of rogue traders.
‘They can and should do more to drive them out and we will expect online marketplaces to cooperate fully with HMRC in tackling non-compliance.’
In its conclusion, the report warned of concerns about HMRC’s ability to deal with new challenges to the problem which may be posed by the UK’s exit from the EU.
The report stated: ‘There is considerable uncertainty over the exact terms on which the UK will leave the EU. It is therefore difficult to be sure of its effect on online VAT fraud. Sellers based in the EU may end up operating under the same VAT terms as currently apply to non-EU sellers and therefore may also be tempted to not charge VAT in the same way.
‘Evidence exists, such as the recent European Anti-Fraud Office (OLAF) report on customs duties, that highlight significant control weaknesses at the UK border even before the UK exit from the EU. Border controls will remain important to the problem of online VAT fraud even when the other measures (joint and several liability, the fulfilment house due diligence scheme and split payments) are in place.’
PAC’s report Tackling online VAT fraud and error is here.
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