MPs on the influential Public Accounts Committee, whilst also criticising the online giants, essentially accused HMRC of complacency, as it didn’t have access to essential data to tackle the problem and has not been taking advantage of newly granted powers to name and shame the Internet giants.
The fraud being highlighted this time round relates to VAT for online sales on the marketplace, where sellers are getting away with not charging VAT to customers - despite often the products being distributed via fulfilment centres in the UK - meaning that traditional, compliant UK businesses are often selling products at a 20% higher price tag.
The law is clear on VAT - goods that are already in the UK at point of sale (in a fulfilment centre) should be charged with VAT. As a result, many sellers on the online marketplaces are operating illegally.
The latest report from the Committee, which has been raising the issue for a number of years, has said that the online marketplaces should be sharing data with HMRC so that the tax department can identify non-compliant sellers.
Meg Hillier MP, 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.
Whilst Amazon and eBay assured the committee that non-compliant sellers were being stopped from using their site as soon as HMRC notified them, the committee report was not satisfied that the online marketplaces were doing all that they could.
The report notes that eBay and Amazon could carry out further checks to assess compliance of sellers on their platforms, but input from HMRC would be needed. The online companies see data-sharing as an effective way to tackle the problem, but HMRC admitted that it does not yet have access to all the data it needs from said companies to identify non-compliant traders.
Long story short, if both sides co-operated, more could be done. Even HMRC’s own estimates (which have also been called into question in the report and labelled “uncertain” - with a view that the figure could be higher) suggest that as much as £1.5 billion could have been lost in tax revenue between 2015-16.
On moving forward, the report notes:
HMRC should, by March 2018, put in place an agreement, applicable across the whole online marketplace, that sets out the collaborative working arrangements between HMRC and the online marketplaces, including details of co-operation, data sharing and expectations of a prompt response to evidence of non-compliance.
Whilst the online marketplaces certainly have a responsibility to weed out non-compliant sellers, it’s also true that the tax authority should be doing all it can to hold the online marketplaces to account. And it is the Public Account Committee’s view that this has not been the case.
This is particularly pertinent on two fronts - HMRC’s attempts to track the number of fulfilment centres in the UK out of which online marketplaces are operating and the tax department’s unwillingness to use its legal powers to shame online companies into complying.
On the latter point, the Committee notes that HMRC has only recently begun to tackle the problem using the legal tools available to it. This is because it was waiting for the Finance Act 2016 to come into force. However, the report notes that “even so, HMRC has been too cautious in using these new powers”.
The Committee said that HMRC has not named and shamed non-compliant traders and so far has not prosecuted a single seller for committing online VAT fraud.
On the former point, the report highlights how HMRC has little idea how many fulfilment centres there are in the UK, which are used by overseas sellers to export goods to the UK and store them, before selling them on to UK customers through the online marketplaces (often without charging VAT).
HMRC has estimated that there are between 500 and 3,000 fulfilment centres in the UK - hardly a close gap guess. The Fulfilment House Due Diligence Scheme, due to come into effect in April 2018, will require fulfilment houses to register with HMRC. However, it is not clear how HMRC plans to enforce this requirement, given it doesn’t know where these centres are.
And to complicate matters further, on what is an already very complex issue, the Public Accounts Committee is concerned regarding the uncertainty surrounding the terms on which the UK will exit the European Union. Diginomica regularly outlines the impact of exiting the European Union and the challenges that are faced in untangling decades worth of policy, process and systems.
The report notes:
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.
HMRC expects leaving the EU to pose four big challenges to the department as a whole: customs; indirect taxes, particularly VAT; data sharing with other EU countries; and the welfare state (with respect to treatment of EU citizens).
A complicated situation without Brexit. Throw Brexit into the mix and it’s shambolic.