Having campaigned about on-line VAT Fraud for the past 2 years, it’s welcome news that our campaign is finally on the political agenda and steps are being made to solve the issues.

George Osborne announced a series of measures to combat online VAT Fraud in the March 2016 Budget (starts at 13:01:35). These measures include:

It’s good to see the government has finally acknowledged the scale of the VAT Fraud. In the governments Fulfilment House Due Diligence document David Gauke MP, Financial Secretary to the Treasury is quoted:

“This abuse has grown significantly and now accounts for £1-1.5bn of the total VAT gap. These overseas traders are unfairly undercutting all businesses trading in the UK, abusing the trust of UK consumers and depriving the government of significant revenue.”

However, looking through the proposed changes to the law we have some serious misgivings regarding some of the measures.

VAT: Joint and several liability for on-line marketplaces

Under the proposed rules, if an on-line marketplace facilitates fraudulent transactions for traders they are not required to take any action until HMRC spots the fraudulent transaction. Once HMRC is aware of it they will issue a notice to the on-line marketplace stating that, unless the on-line marketplace makes the trader comply with VAT regulations or removes them from their marketplace within 30 days, the on-line market place will be liable for the VAT in respect to the sellers future taxable sales through that on-line marketplace.

This measure is misleadingly titled ‘third party liability’. It is however no such thing. Instead of making an on-line marketplace liable for any fraud that it knew or should have known was taking place, this measure amounts to nothing more than an amnesty for the on-line market place.

It places the onus on HMRC to notify the on-line marketplace of the fraud and gives the on-line marketplace the opportunity to remove the fraudulent trader and not suffer any consequences of any previous fraudulent trade. In effect the measure allows an on-line market place to abdicate any responsibility for allowing the fraud in the first place, even if they knew or should have known it was taking place. In our view this arrangement is not compatible with EU VAT law.

The rules on liability for VAT fraud are already very clear. Anyone participating anywhere in the supply chain that knew or should have known the transaction was fraudulent is liable – that is the test to ensure that nobody profits from fraudulent transactions that abuse VAT law.

The net effect of this proposed legislation is that it is an amnesty for VAT fraud that amounts to a tax exemption for those on-line market places who have been able to profit from the fraud.

It has done little to change what on-line marketplaces already do.

This does nothing to stop non UK businesses, who’ve been caught not paying VAT, from simply shutting down operations and re starting under a different name until they are caught again. Then do the same thing again and again and again…

This is hardly the self policing system that is required. Instead the policing responsibility lies with HMRC, who have already demonstrated a complete inability to police the £1-1.5 billion fraud in the first place.

Does HMRC believe it has the time and resources to police on-line marketplaces for VAT Fraud properly. The only way to stop on-line VAT fraud is to put the onus on the on-line marketplace to police its sellers.

Appointing VAT Representative for Overseas businesses

HMRC is strengthening existing VAT legislation for overseas businesses by making them appoint a UK-established VAT representative and giving HMRC greater flexibility in relation to when it can require some form of security.

This is a welcome change. However the issue is that most of the overseas businesses committing VAT fraud are not registering for VAT in the first place.

Fulfilment house due diligence scheme

A new due diligence scheme for UK fulfilment houses handling goods imported from outside the European Union has been proposed for 2018, which will set out standards of due diligence and record-keeping, and introduce penalties for non-compliance.

This will make fulfilment houses and the supply chain responsible for ensuring the goods they are handling and orders they are fulfilling are for bona fide VAT compliant non UK & UK businesses. It should force fulfilment centres to stop dispatching orders for non UK businesses who have not supplied a VAT number.

This is another very welcome addition to the fight against on-line marketplace VAT Fraud.

However it is disappointing the scheme does not extend to making fulfilment houses liable for being part of a fraudulent supply chain.

What the budget failed address

Our campaign is to force on-line marketplaces to make sellers comply with current EU Law and strengthen current regulations. The budget failed to address the following issues:

    • Abuses of LVCR:
      LVCR (a relief from VAT on goods with a value of £15 or less) is only applicable to packets that are addressed to individuals in the EU as was ruled in Har Vaessen Douane Service BV v Staatssecretaris van Financiën in 2009. Even if imported in bulk the individual packets must contain an address of an individual customer to qualify for LVCR. HMRC are allowing the clearance of thousands of packets with bar codes on them instead of an address which is in breach of EU law. Packets are not being sent to individuals and are instead being sent to warehouses where having claimed an exemption from VAT illegally they sit as stock awaiting an order from a UK customer. This abusive practice should be prevented by HMRC and no mention was made of it in the Budget.
    • Displaying VAT Numbers – Electronic Commerce (EC Directive) Regulations 2002
      Non UK companies must display a valid VAT number registered to their company name on all on-line marketplaces BEFORE they list products located in the UK.
    • Business Seller Account Verifications:
      On-line marketplaces must verify all seller business details with supporting documents. NON UK Companies listing stock located in UK need to provide VAT numbers.
    • PayPal and eBay Business Seller Accounts:
      eBay Business Accounts should only be allowed to be linked to a PayPal account registered to the same business