Julia Irvine 20 Apr 2017 12:51pm

HMRC failing legitimate online retailers over VAT fraud and error

The Revenue's approach to dealing with the problem of VAT fraud and error relating to non-EU online retailing is putting UK VAT compliant retailers at such a disadvantage that they risk going out of business

This, says the National Audit Office (NAO), means that the costs incurred are far higher than the £1bn to £1.5bn that HMRC estimates is being lost to the UK exchequer every year, since the fraud and error also has an adverse impact on UK businesses’ competitiveness.

The NAO’s conclusion follows an investigation into the issue in response to increasing concerns raised by the Public Accounts Committee, UK trader groups and other organisations including (a campaign set up by a group of UK eBay and Amazon business sellers) and Retailers Against VAT Abuse Schemes about HMRC’s lack of action.

The traders told the NAO that they are being routinely undercut by online sellers – including some of the largest online sellers of products such as mobile phone accessories – who do not charge VAT when they should.

Their experience and analysis, they say, indicates that the size of the problem has been significantly underestimated and they accuse HMRC of not doing enough or acting quickly enough to tackle the problem, even though they have been reporting their findings to the department since 2014.

HMRC did in fact carry out a strategic threat assessment in 2014 that identified the main culprits as organised criminal groups based in the UK and overseas sellers in China. It concluded that they use fulfilment houses – a type of warehouse where goods can be stored before delivery to the customer – to facilitate the transit of undervalued or misclassified goods (or both) from China to the UK.

The Revenue's chosen approach to detecting and correcting online VAT non-compliance has been to use intelligence to uncover suspected fraudulent traders. But the UK trader groups say that there is much more that HMRC and online marketplaces could be doing with seller data to tackle fraud.

The department has also chosen to focus on fulfilment houses rather than asking the Border Force to check consignments or packages at the point of import. Yet it admits it does not know how many fulfilment houses there are in the UK and has estimated the number at between 500 and 3,000.

That should start to change in April 2018, when all fulfilment houses will be required to register with HMRC and carry out due diligence on their overseas customers.

The NAO also found that HMRC does not think criminal prosecution is an “appropriate response” to online VAT fraud, since there are particular difficulties in bringing cases which make them lengthy, costly and with an uncertain outcome.

Instead it has pursued civil operations and in 2016/17 carried out 279 investigations into businesses and made 373 compliance interventions.

In September last year, HMRC was given new legal powers to tackle VAT fraud and error which it believes will act as a major deterrent. These include making online marketplaces potentially jointly and severally liable for non-payment of VAT when HMRC has told them of an issue with a seller and they have not taken appropriate action.

Since then, the department has been “testing the powers” on 200 high-risk sellers and has given out 27 pre-notifications and 37 full notices.

Over the six months since implementation, HMRC has seen an increase in the number of new registrations from non-EU sellers.

As a result of the new powers, the NAO has decided that it is too soon to conclude on their effectiveness and impact, and whether the resources devoted by HMRC to using them actually matches the scale of the problem.

“We recognise that HMRC must consider effort and efficiency in collecting VAT but its enforcement approach to online trade appears likely to continue the existing unfair advantage as perceived by UK trader groups,” the NAO says.

“This is contrary to HMRC’s policy of encouraging voluntary compliance and it does not take account of the powerful effect that HMRC’s enforcement approach has on the operation of the online market as a whole. We intend to return to this subject in the future.”

In 2015/16, net revenue from VAT was £116bn with a tax gap of some £12.2bn (about 10% of the total VAT that should have been collected).

HMRC’s estimate puts VAT fraud and error at between 8% and 12% of the total gap.