In partnership with Bloomberg BNA five leading CIOT members have written analyses of the measures in Autumn Budget 2017. This piece, by CIOT Head of Technical Richard Wild, looks at the VAT measures in the Budget.
The Government is taking further steps to clamp down on those businesses who sell through online market places, but do not account for the VAT properly due. This costs the UK a reported £1.2bn a year in lost VAT revenues.
Online retail spending is growing fast, and represents around 15% of total retail spending. The availability of goods through online market places significantly increases customer choice. But that increased customer choice puts a strain on the tax system, largely because the lack of a ‘physical’ presence such as a shop makes it difficult for HMRC to identify sellers and enforce the VAT rules. Further, according to a recent Ipsos MORI survey, most customers did not feel any sense of responsibility for ensuring that this was correctly paid, and saw VAT as a transaction that took place between the seller and HMRC. Customer attitudes also saw an indifference to the location of the supplier, and some participants were unaware that they had in fact purchased from an overseas seller.
Steps have already been taken to try and increase VAT compliance in this area. As recently as September 2016, online marketplaces could become liable to the VAT due by their non-UK sellers, but only after HMRC has given the operator of the marketplace a notice to stop marketing the seller’s items. And from April 2018, HMRC will start to accept registrations for the Fulfilment House Due Diligence Scheme, which goes live in April 2019, and 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. We know that these measures, as well as steps being taken by the operators of online marketplaces themselves, are already bearing fruit, as HMRC have reported a greater than tenfold increase in VAT registrations by non-UK businesses.
In today’s Budget, the Chancellor announced more steps to combat fraud and non-compliance in this area, and further highlight the challenges of raising and collecting revenues in an increasingly globalised economy. These measures will be in Finance Bill 2017-18 and will take effect from Royal Assent of the Bill:
First, the existing provision in Section 77B will be extended to UK businesses, so HMRC will be able to hold online marketplaces jointly and severally liable for any future unpaid VAT of UK (as well as non-UK) sellers, arising from sales of goods in the UK via that online marketplace.
Secondly, it will enable HMRC to hold online marketplaces jointly and severally liable for any unpaid VAT of a non-UK business arising from sales of goods in the UK via that online marketplace, where that marketplace knew or should have known that the non-UK business should be registered for VAT in the UK.
Thirdly, it will require online marketplaces to display a valid VAT number for all their sellers using their platform, when they are provided with one by the seller. The marketplaces will also be required to ensure that VAT numbers displayed on their website are valid, thus ensuring that fictitious and hijacked VAT numbers are not displayed, with the spectre of penalties if the requirements are not complied with.
This package of measures will be welcomed by the many compliant sellers who for years have had to compete against those who are non-compliant and can price accordingly. Whilst operators on online marketplaces will have to adapt to deal with these requirements (more of this below), it is a “one to many” solution ie a compliance burden placed on a small number of businesses (the marketplaces) yet has an extensive reach (the many non-compliant businesses). Interestingly, revenue expectations from the measure are quite modest – a peak of £50m additional revenue expected in 2021-22, and total additional revenue of £165m by 2022-23 – but add to the revenue secured by previous measures.
So where are the complications? Well, those in the VAT world will be familiar with the phrase “knew or should have known” and uncertainty over what it means in relation to the extent to which businesses need to take steps to satisfy themselves that they are not unwitting participants in VAT fraud. Further, tracking the requirement of sellers to register for VAT will be difficult, for example, sales through the marketplace might represent only part of a UK businesses income, and whilst non-UK businesses do not get to enjoy the benefit of the VAT registration threshold, EU sellers are subject to the distance selling rules. So the “knew or should have known” test could be difficult to both comply with and administer. Also, checking the validity of a VAT number is currently easy through the VIES system, but once the UK leaves the EU will the VIES system continue to be updated by HMRC in order to maintain its integrity?
It will also be interesting to see the UK Government’s response to the consultation on split payments, where the VAT element of a transaction is paid direct to HMRC, or to a separate, secure bank account, and this is expected to be published in December. A number of other countries have already implemented (or are implementing) split payment models, and implementation of such a measure in the UK will represent a further step in the fight against online VAT losses, but will no doubt also represent a toe in the water for other industries.
By Richard Wild, Head of Tax Technical, CIOT
This article was first published by Bloomberg BNA as part of their Budget 2017 special report
 See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/643437/Prevalence_of_individuals_shopping_online_from_overseas_and_handling_of_VAT__Report_473_.pdf
 Section 77B, VATA 1994.
 See: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/601027/Alternative_method_of_VAT_collection_-_Call_for_evidence.pdf where it is reported that online overseas businesses applying to register for VAT has increased from 700 in 2015 to 8,700 in 2016.