The Chancellor’s announcement a crackdown on online VAT fraud highlights the challenges of raising revenue in a globalised economy.
In today’s budget (22 November), Philip Hammond confirmed that the government would take further steps to clamp down on businesses who sell through online marketplaces but fail to pay VAT. Such activity reportedly costs the UK an estimated £1.2 billion in lost revenues.
Under the proposals, HMRC’s powers will be extended to hold both sellers and the online marketplaces on which they trade liable for unpaid VAT (‘joint and several liability’). This will also be extended to include UK (as well as overseas) sellers.
Since 2016, the government has taken a number of steps to increase VAT compliance, including making online marketplaces potentially liable for VAT due by their non-UK sellers. From April 2018, HMRC will start to accept registrations for the Fulfilment House Due Diligence Scheme, which will oblige fulfilment businesses in the UK to register with HMRC, keep certain records and carry out robust due diligence checks on their overseas customers.
But the Institute also warned of the challenges associated with enforcing the new rules, such as understanding whether their sellers are required to register for VAT, and the level of ‘due diligence’ that the online marketplace needs to undertake to protect themselves from a liability.
Commenting, Alan McLintock, chair of the CIOT’s Indirect Taxes sub-committee, said:
“The rise of online shopping has changed the way we shop but it has done so at the expense of the tax system. Enforcement of the VAT rules is naturally more difficult with overseas online sellers.
“We have already seen a ten-fold increase in the number of VAT registrations by non-UK businesses before today. This is a good example of the effectiveness of the steps already taken by HMRC to ensure compliance1.
“Today’s measures are welcome step, building on the good progress already made by HMRC to tackle the issue of online VAT avoidance. It will be welcomed by retailers who for years have paid the appropriate amount of VAT due but who have had to compete against those who have not.
“However, the rules around VAT registration are not necessarily straight forward, and online marketplaces will need to satisfy themselves that they have taken sufficient reasonable steps to protect themselves of assertions by HMRC that they “knew or should have known” that a seller should be VAT registered in the UK.”
Notes for editors
1. An HMRC consultation on alternative methods of VAT collection reported that the number of online overseas businesses applying to register for VAT had increased from 700 in 2015 to 8,700 in 2016. Click here for further details.
2. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
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