The Hydra, in Greek mythology, is a terrifying mythical monster that has the body of a serpent with nine vicious heads. If one head is cut off, two new ones grow in its place. This make the Hydra almost impossible to kill. One of the Hydra’s heads can never be harmed by any weapon.
Just like the Greek mythical monster, Hydra Sellers are impervious to attack. When HMRC chops off one of their Online Marketplace accounts, the Hydra Seller quickly grows two new accounts. The Hydra Sellers unstoppable rampage continues with them selling more VAT free, counterfeit, non-compliant & dangerous goods, sold on the back of fake reviews, to their unsuspecting victims. Most of their goods will quickly end up discarded and recycled at the tax payers expense.
The Hydra Seller’s head that can never be harmed, often resides in Shenzhen, where it is completely out of reach for HMRC to prosecute.
Hydra Sellers setup multiple Online Marketplace accounts using different names and identities, often cloned or stolen from UK businesses and customers, to sell the same stock, dispatched from the same fulfilment house.
The Hydra Sellers legitimate* VAT registered business, will import the stock into the UK and place it in a huge Chinese government funded fulfilment centre like the one you see looming near the M1. The stock will almost certainly be misdeclared and hugely undervalued so very little import VAT and duty is paid.
*The term “legitimate” is used very loosely here.
Online VAT Fraud – The Numbers Stack Up
HMRC estimate Online VAT Fraud is £1.5bn a year. HMRC has only collected £205m in VAT from Overseas Sellers between 2016 to 2018. This amounts to 6.83% of what should have been collected. £5,590,000,000 or 93.17% has gone missing and uncollected in the last four years.
£5,590,000,000 in lost VAT revenue equates to £33,540,000,000 in gross sales revenue UK Sellers have lost to Hydras & VAT Fraudsters. Online VAT Fraud now makes up over 10% of the total UK VAT Gap.
We need to stop the Hydra Sellers rampage and their destruction of legitimate VAT, Tax, NI, PAYE & Rate paying UK Sellers, who support and provide jobs to their local communities.
Hydra Loopholes – Fulfilment House Due Diligence Scheme
Chinese owned Fulfilment Houses in the UK, such as 4PX, offer Overseas Sellers very sophisticated fulfilment services and systems. This allows a seller to link up lots of Online Marketplace accounts to the same stock. The system will automatically download the orders and mark them as dispatched on each of the sellers accounts. This enables a Hydra Seller to list the same item hundreds of times on their Online Marketplace accounts.
Because HMRC’s Fulfilment House Due Diligence Scheme is deeply flawed, a Fulfilment House is under no legal obligation to verify any of the business details of the Online Marketplace accounts attached to it’s fulfilment system by the Hydra Sellers.
This allows Hydra Sellers to connect multiple Online Marketplaces accounts that have been setup using fake, cloned or stolen identities to their stock in the fulfilment house.
Hydra Loopholes – Online Marketplace Seller Checks
The Online Marketplace Seller Checks is yet another deeply flawed piece of legislation that has come out of HMRC’s head office.
The only responsibility an Online Marketplace has, is to check that the VAT number provided by a seller is valid and matches the business name provided. The Marketplace is under no legal obligation to check if the seller is the legal owner of the VAT number or business name. No copies of VAT certificates, incorporation certificates, bank statements, service bills or passports are checked.
If an overseas seller registers a new account and pretends to be a “UK Seller” no checks are needed whatsoever.
You need more ID to take a book out of a library than you do to set up a multi million pound Online Marketplace business account.
This flaw allows the Hydra Seller to set up multiple Online Marketplace accounts using:
- Cloned VAT numbers & business details of UK companies.
- Stolen identities and addresses from previous UK customers. GDPR Regulation mean diddly squat to a company based in China.
Please note Marketplaces such as Amazon, who operate their own payment processing system, have to fully verify a business sellers details due to Anti Money Laundering Regulations. Marketplaces such as eBay don’t process payments, Paypal does, so they don’t adhere to Anti Money Laundering Regulations.
To get around the Anti Money Laundering Regulations on Amazon, Hydra Sellers will registers several legal business entities.
Hydra VAT Numbers
HMRC recently announced that 78,000 Overseas sellers have registered for VAT since 2016, up from 58,000 last year. This is HMRC’s spin for “78,000 Overseas sellers owe HMRC £585 million in VAT and have intention of paying it”.
In 2016, shortsighted HMRC announced “HMRC tackles online VAT fraud in time for Christmas“, having handed out 7,185 VAT numbers to Overseas Online retailers in a year.
All is not what it seems; there are not 78,000 VAT registered Overseas Sellers paying VAT. HMRC are giving out VAT numbers two to the penny. Hydra Sellers can register hundreds of VAT numbers and use them to setup lots of online marketplace accounts. They have no intention of paying VAT. They just need VAT numbers to operate their scam.
Hydra Sellers who operate large companies in China will demand all their employees to register for VAT. These newly acquired VAT numbers are then used on the Hydra Sellers Marketplace accounts.
This is why you see many Overseas Seller VAT numbers registered to HMRC NETPs Unit in Aberdeen are in individuals names rather than company names.
Hydra Sellers – Why so many Marketplace Accounts?
Hydra Sellers are greedy, extremely greedy, they want to make as many sales and make as much money as possible. They care little about rules and regulations.
Hydra Sellers operating multiple accounts on Marketplaces such as eBay.co.uk & amazon.co.uk are able to dominate the Marketplaces and Googles search results with many listings of the same product. They can list their whole product catalogue many times over. This ploy crowds out the compliant sellers who only list one product on one account, and ensures the Hydra Seller takes the lion share of sales.
It is against eBay Policies for a seller to operate multiple accounts. Joe Billante, eBay Vice President, stated to the Public Accounts Committee on 13th of September 2017 (Q62 and Q67) that sellers cannot operate multiple accounts if they are selling the same products in the same categories, and that eBay have internal systems in place to ensure compliance.
By setting up multiple accounts under different names, a hydra seller can fly under eBay’s policy radar. Not that eBay police these policies; one Chinese eBay seller, Ekey Technology Ltd, operated 24 eBay accounts under the same business name. They are currently listed on HMRC’s list of deliberate tax defaulters owing HMRC £6,423,728.80. eBay’s radars are broken.
Online Marketplaces are allowing Unlawful Anti-Competitive Behaviour by taking no action against sellers operating multiple seller accounts.
Hydra Paypal Accounts
Another flaw in the UK’s out of date policies is that a hydra seller can link all their Online Marketplace accounts to any Paypal account. It does not need to match the business details of the sellers Marketplace account.
Marketplaces such as eBay allow sellers to link eBay accounts to a PayPal account that belong to completely separate legal entity. This flaw is perfect for Hydra Sellers & money laundering.
Hydra Stock – Safe as Fulfilment Houses
Jim Harra, now the Chief Executive and First Permanent Secretary of HMRC, was questioned by the Public Accounts Committee on 30 April 2018 about HMRC’s policies on seizing Overseas Sellers stock from fulfilment houses. Here is what was said:
Q100 Chair: Amazon wrote to Chris Heaton-Harris—a Member of Parliament and former member of the Committee—to say that, to their knowledge, HMRC has never issued a notice to Amazon to seize the third-party goods belonging to a seller in respect of whom HMRC has issued a joint and several liability notice.
Jim Harra: That’s correct. It is not part of our current compliance method for tackling this risk, because we don’t think, as our powers currently stand, it is a practical way of us making a meaningful difference. Whether we can use that is definitely an area that we want to look at.
So there you have it, HMRC does not actively seize stock when they issue “Red Flag Notices” to Online Marketplaces.
How bloody brilliant is that for a Hydra Seller? Their stock is safe as houses when stored in a fulfilment house. All they need to do is setup two new accounts to replace the account that HMRC red flagged.
Hydra Seller Case Study
We recently gave evidence to the Government’s APPG for Business Support & Engagement inquiry ‘Online Selling Platforms and VAT: A Level Playing Field?’ on HMRC’s failure to tackle Online VAT Fraud.
We provided this case study as part of our evidence:
Seven eBay Hydra Seller accounts operated by a Chinese company called Eternity International Trading Limited. We believe they could be operating hundreds of Hydra Seller accounts.
We secret shopped (something HMRC doesn’t do) from the seven accounts and all the payments went to Eternity International Trading Limited PayPal account. We reported the accounts to eBay, who asked us to report them to HMRC, citing it was not their responsibility.
Eternity International Trading Limited uses a combination of fake UK seller accounts and VAT numbers registered to Chinese Individuals.
Please note these accounts may have closed by the time you read this. That is if HMRC take action against them.
1) honey2bees
honey2bees,1 Prestonfield Road Edinburgh Midlothian EH165EL
VAT number: None
Note: No company name or VAT number. Is the address cloned from a previous customer?
fivefingers99q, 25 Bilsborrow Road, Manchester, Lancashire, M14 7TH
VAT number: None
Note: Account no longer trading. No company name or VAT number. Is the address cloned from a previous customer?
YING WANG, 9 West Pilton Bank, Edinburgh, Eh4 4HN
VAT number: GB 308667971
Note: Overseas Chinese Individual with VAT number registered to them. UK address. Is the address cloned from a previous customer?
4) cuddly-toys1
SHAOLAN YANG, Block B,8/F HOUSE 13, SCENIC GARDEN, 9 CHEUNG KWAI ROAD , 香港
VAT number: GB 282130038
Note: Overseas Chinese Individual with VAT number registered to them. Chinese Address.
5) line10street
QIUXIA HU, Room 401, Number 24, Lane 651, Pudong Main Street 200120 SHANGHAI
VAT number: GB 247317307
Note: Overseas Chinese Individual with VAT number registered to them. Chinese Address.
6) wide5awake
GUOXIN REN, ROOM601,NO25,LANE977, 200093 SHANGHAI, 上海
VAT number: GB 275653964
Note: Overseas Chinese Individual with VAT number registered to them. Chinese Address.
TIANYU GAO, ROOM 4F,5/F,BLOCK 2,HOI TAK GARDENS, 13-17 WING FAT LANE, TUEN MUN, HONG KONG
VAT number: GB 282816090
Note: Overseas Chinese Individual with VAT number registered to them. Chinese Address.
Who is liable?
If a Hydra Seller is caught and red flagged to the Online Marketplace there will be an outstanding VAT liability. There certainly will be little chance of it being paid by the Hydra Seller sitting in their office in Shenzhen China. So who is liable for paying the missing £billions in VAT?
HMRC has introduced several versions of their Joint and several liability for online marketplaces policies over the years. The purpose of the policy is to make Online Marketplaces liable of unpaid VAT. But because the policy is so badly designed, there is very little chance of the Marketplaces being made liable.
We had a meeting with HMRC early in the year pointing out the issues with their policies and Hydra Seller accounts. HMRC didn’t see it as a problem.
Is HMRC going to make Online Marketplaces liable for Hydra Sellers unpaid VAT debt?
We doubt it.
The Marketplace certainly are confident they are not liable. They have followed all HMRC’s guidelines.
Solutions
The introduction of poorly judged, badly implemented policies and legislation is clearly not working. In addition to that, out of date legislation is not fit for purpose in the modern world of global Online Cross border e-commerce. Online Marketplaces are being hugely distorted in favour of non-complaint overseas sellers.
Things need to change fast. Here are a few solutions:
1) Regulate Online Marketplace
It is very obvious that Online Marketplaces cannot be trusted to regulate their sellers from selling VAT free, counterfeit, non-compliant & dangerous goods sold on the back of fake reviews, that quickly end up in recycling centres across the UK.
If Online Marketplaces cannot regulate their sellers, then the government needs to regulate the Marketplaces, just like pub landlords.
2) Seizing Stock & Close Accounts
HMRC’s current enforcement policy is as effective as a chocolate teapot. When issuing a “Red Flag” notice to an Online Marketplace, HMRC must:
- Identify the fulfilment house where the stock is located.
- Identify the legal owner of the stock.
- Identify all the Online Marketplace accounts linked up to the stock.
- Seize the stock
- Close all the Hydra Sellers accounts.
3) Make Online Marketplaces Collect VAT
The Treasury must introduce legislation that will make Online Marketplaces collect VAT.
The EU have already announced they will make Online Marketplaces collect VAT from January 2021
4) Online Marketplace Seller Checks
Online Marketplaces must fully verify all Overseas and UK sellers’ business details including:
- Business Name or Sole Traders Name
- Directors Name
- Business Address
- VAT Number
This information needs to be supported with documents such as Passport, VAT certificates, incorporation certificates, bank statements & service bills.
5) Fulfilment Houses Due Diligence Scheme
Fulfilment Houses need to be held responsible for ensuring their customers are compliant. HMRC’s Fulfilment House Due Diligence Scheme must be extended to make all fulfilment houses check and keep full business records. This includes company name, address and VAT numbers for every Online Marketplace seller account that is connected to their system – ensuring that the details match the legal owners of the stock being dispatched.
Fulfilment Houses must be made third-party liable if any fraud is committed.
6) Anti Money Laundering
Make all Online Marketplaces adhere to Anti Money Laundering Laws.
All sales generated from Marketplaces must be transferred to PayPal accounts registered to the same legal entity. I.E “ABC Ltd” should only be able to link their eBay account to a PayPal account registered in the name of “ABC Ltd”
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