VAT and online sales platforms

In the 2019/20 tax year, the British government lost £11.7 billion due to unpaid VAT. While the VAT accounting system in the UK does give fraudsters considerable scope, such a high level of financial crime has never been recorded before.

Huge losses for the Treasury on online marketplaces

The largest scale of fraud concerns VAT on online trading platforms. HMRC estimated that in the 2015/16 tax year, foreign sellers collectively failed to pay approximately £1.5 billion in dues. To avoid paying taxes, fraudsters often do not provide their VAT number, undervalue shipments, falsify invoices, and in extreme cases, use the details of other companies.

In 2018, seven leading online sales platforms (Amazon, eBay, Fruugo.com, Wolf & Badger, Etsy, ASOS, and Flubit) signed a cooperation agreement with HMRC aimed at promoting compliance with VAT payment rules and agreed to share data on companies operating on their marketplaces.‍

Amendment to VAT regulations for overseas shipments

From December 31, 2020, VAT on overseas shipments with a value of less than £135 will be charged at the point of dispatch, not at the point of receipt.

Furthermore, if an online sales platform handles the delivery of:

• shipments from abroad;
• goods located in the UK but sold by an overseas distributor

then the seller is deemed to have made the supply to the online marketplace (you can find a link to the legislation here).

The online sales platform becomes the deemed supplier and is liable for VAT accounting.

The definition of an online sales platform is set out in these regulations.

The UK government decided to introduce these changes to create a level playing field for UK and overseas sellers after Brexit. The European Union is set to introduce similar changes from July 2021.

The regulations go even further – online sales platforms are obliged to determine which seller is liable for VAT, and in some situations, to account for VAT on their behalf. It is therefore advisable for every platform to be certain of the legal and tax conditions by seeking expert advice from tax advisors and lawyers.

Will the new VAT accounting rules help combat financial fraud?

From April to December 2020, HMRC sent only 80 individual requests for data on sellers using online sales platforms, whereas in the 2019/2020 tax year, there were as many as 2684. HMRC explains its actions by relocating vast financial resources to support businesses during the coronavirus pandemic.

It is therefore unclear how HMRC plans to implement the new regulations at a time when it has a rather limited budget for investigations into online sellers.

When online sales platforms act as deemed suppliers, there will be significantly fewer interactions between the UK tax authority and sellers. However, foreign sellers will still be active, and dishonest ones, not being on HMRC's radar, will have even more scope to operate. This could have the exact opposite effect to what was intended and lead to an increase in financial crimes.

HMRC cannot expect online sales platforms to be able to identify all instances of tax evasion, especially without specialized software, such as Connect. 

In light of these reports, a certain mechanism may emerge – if tax fraud continues to occur on such a large scale, the search for culprits will intensify. The more responsibility placed on online sales platforms, the less interested they will be in cooperating with HMRC and sharing data on sellers using their services.

If you run an e-commerce business, we'd be happy to show you how to effectively manage your accounting and taxes, even if Brexit-related changes have slowed your growth.
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