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Public Accounts Committee report says honest businesses and taxpayers losing out while marketplaces profit from fraudsters.

• Read the report summary
• Read the report conclusions and recommendations
• Read the full report: Tackling online VAT fraud and error

British business is being hit hard by unfair and illegal tax practices

The Public Accounts Committee report says British business is being hit hard by unfair and illegal tax practices by overseas competitors using online trading platforms.

In their report, the Committee warns that online sellers who do not charge VAT when they should can undercut prices offered by UK businesses by up to 20%, "forcing many to lay off staff or even go out of business".

Taxpayers are also losing out as online VAT fraud leads to a significant loss of revenue to the Exchequer, depriving public services of funds at a time of austerity.

UK taxpayers lost £1 billion to £1.5 billion in 2015–16 from online VAT fraud

HM Revenue & Customs (HMRC) estimates that UK taxpayers lost £1 billion to £1.5 billion in 2015–16 from online VAT fraud. The Committee concludes the authority's estimate of the impact of such fraud is "out of date and flawed" and sets out measures for HMRC to address this.

The Committee describes HMRC as "playing a game of cat and mouse" with companies based outside the UK and calls on the authority to take high profile enforcement action.

It concludes HMRC has been too cautious in using new powers, highlighting that the authority "has not named and shamed non-compliant traders and so far has not prosecuted a single seller for committing online VAT fraud".

Online marketplaces "not been taking the issue of VAT fraud seriously"

Online marketplaces have not been taking the issue of VAT fraud seriously, says the Committee. It calls on HMRC to be tougher on such marketplaces which in many cases sell goods via warehouses or "fulfilment centres" physically based in the UK.

When online VAT fraud occurs, marketplaces continue to earn commissions "and therefore profit from people who are defrauding the British taxpayer".

The Committee believes HMRC and online marketplaces should do more to work together to tackle the problem and urges HMRC to put in place by March next year an agreement setting out collaborative working arrangements, "including details of co-operation, data sharing and expectations of a prompt response to evidence of non-compliance".

The Report states: "This should include a requirement for all online marketplaces to ensure that a valid VAT number is showing for any non-EU trader selling goods to customers in the UK, where those goods are already in the UK. In the absence of a legal requirement to do so we would expect online marketplaces to implement this measure voluntarily."

Chair's comments

Meg Hillier MP, Chair of the PAC, said:

"Online VAT fraud is hugely damaging yet, as online sales continue to grow, the response of HMRC and the marketplaces where fraudsters operate has been dismal.

HMRC needs to be far tougher in protecting the interests of British businesses and taxpayers. As a priority it must inject more urgency into enforcement action. But it should also push the case for further new powers.

Online marketplaces tell us they are committed to removing 'bad actors' yet that sentiment rings hollow when those same marketplaces continue to profit from the actions of rogue traders.

They can and should do more to drive them out and we will expect online marketplaces to cooperate fully with HMRC in tackling non-compliance.

Our Committee’s own mystery shopping exercise demonstrated just how simple it is to buy goods online without paying VAT. We got no sense that the traders responsible felt under any obligation to pay their dues.

Clearly this is not good enough. The message must go out loud, clear and backed by the full weight of law: the UK is not a soft touch for VAT fraudsters."

Report summary

British business is being hit hard by unfair and illegal tax practices by overseas competitors using online trading platforms.

HMRC’s own estimates are that UK taxpayers lost £1 billion to £1.5 billion in 2015-16 from online VAT fraud.

Online sellers based outside the European Union (EU), who do not charge VAT when they should, are able to undercut the prices offered by law-abiding UK businesses by up to 20%, forcing many to lay off staff or even go out of business. Most customers are unaware of this fraud.

HMRC "slow in catching up" to abuse

The issue is not new, the Committee first raised this in 2013 and campaign groups such as RAVAS and VATfraud.org even before this, yet significant abuse continues and the online marketplaces and HMRC have been slow in catching up.

While HMRC has been slow to act it is playing a game of cat and mouse with companies based outside the UK and therefore harder to tackle. We believe that this is all the more reason for high profile enforcement action to send out the message that the UK is not a soft touch for VAT fraudsters.

The common link is that physical goods are sold via online marketplaces, in many cases via warehouses or 'fulfilment centres' physically based in the UK. HMRC needs to be tougher on these marketplaces.

HMRC believes new powers will be sufficient

HMRC believes that the combination of its new powers—joint and several liability, the Fulfilment House Due Diligence Scheme and the split payments method of collecting VAT—will be sufficient to tackle the problem but these will not produce instant results and there is no guarantee that this will be enough.

The online marketplaces have not been taking the issue seriously. Just to register to sell a few personal belongings on eBay, for example, a seller has to provide numerous details, yet the overseas seller cheating on VAT can do so with relative ease.

The Committee conducted some mystery shopping which showed how easy it was to buy something, have it delivered the next day from a UK base and not pay VAT. We were even offered a partial refund when we repeatedly requested a VAT invoice.

With Brexit and the uncertainty over trading and customs this issue is only going to get more complicated.

Further information

• About Parliament: Select committees
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