HMRC’s Half-Built Wall: How the UK's Deemed Reseller Rules Are Failing to Prevent VAT Evasion on Online Marketplaces

A structural loophole in HMRC’s 2021 online marketplace VAT rules is being systematically exploited by overseas dropshippers using bogus UK limited companies. Until HMRC extends deemed reseller obligations to all marketplace sellers - not just overseas ones - the evasion will continue unchecked.

1.  Background: The 2021 Deemed Reseller Rules

In January 2021, HMRC introduced the deemed reseller rules as part of a wider effort to close the VAT gap on cross-border e-commerce. The rules placed online marketplaces - such as eBay, Amazon and Etsy - in the position of ‘deemed seller’ for VAT purposes when facilitating sales by overseas sellers to UK consumers. In practical terms, this meant the marketplace, not the individual seller, became responsible for collecting and remitting VAT on those transactions.

The policy was a direct and overdue response to the widespread problem of overseas sellers - particularly those based in China - selling goods into the UK without charging VAT, undercutting compliant domestic retailers and depriving the Exchequer of significant revenue. On paper, the rules represented a sensible and practical solution: rather than trying to police thousands of individual overseas sellers, HMRC shifted the compliance burden to a small number of large, easily regulated marketplace platforms. The problem is that HMRC only built half the wall.

2.  The Gap in the Wall: UK-Registered Sellers Are Exempt

The deemed reseller rules apply specifically to sales made by sellers who are established outside the UK. Where a seller is registered as a UK business - even a newly incorporated, dormant shell company with no real trading presence - the marketplace’s deemed reseller obligations do not apply in the same way. The marketplace treats that seller as a domestic business and assumes VAT compliance is a matter between the seller and HMRC directly.

3.  The Scheme: Bogus UK Limited Companies

Evidence from online marketplaces and Facebook groups suggests that a cottage industry has developed to help overseas individuals – many of whom appear to be based in Pakistan - establish UK limited companies for the specific purpose of trading on eBay and similar platforms as apparent domestic sellers.

Intermediaries are openly advertising services to set up UK limited companies, complete with a UK physical address and UK phone number, for a fee of as little as £20. Crucially, these intermediaries are also helping clients overcome the ID verification hurdles that would otherwise prevent overseas individuals from completing the Companies House registration process unaided. RAVAS has also seen examples of UK director IDs being openly sold.

The paper deception is reinforced by a technical one. Online guides openly advertise the use of UK-based IP addresses - obtained via Virtual Private Servers or residential proxies - combined with anti-detect browser tools, as a means of presenting an overseas-operated account as UK-located during marketplace registration and ongoing account management. Whether eBay’s current verification processes for business seller registration can detect this form of location spoofing is not publicly known. What is clear is that the scheme is operating at scale - these entities are visibly active and trading on eBay UK today - and that the bogus UK limited company structure means that even a perfect geolocation check would not resolve the problem, because the company itself is genuinely UK-registered.

The deception does not stop at corporate structure and technical location spoofing. RAVAS has seen examples of operators stealing listings - titles, descriptions, and product images - wholesale from genuine UK sellers, and using this established seller content to lend credibility to accounts that a newly incorporated shell company could not otherwise command. RAVAS has also seen examples of real VAT numbers belonging to legitimate UK businesses being misappropriated and used by bogus sellers to satisfy eBay’s VAT verification requirements.

A genuine VAT number passes eBay’s checker. The business it belongs to has no idea it is being used. The result is a UK-registered company that, to eBay and to HMRC’s automated systems, looks like a legitimate domestic business seller when in truth, the beneficial owner is overseas, the company has no genuine UK trading presence, and the entire structure exists solely to sidestep the deemed reseller rules.

4.  The Dropshipping Model: How the Trade Works

Once the UK company is established and an eBay seller account is opened in its name, the scheme operates as a straightforward dropshipping operation:

• The seller lists goods on eBay UK at a retail markup. A typical example is a suction-cup car rear-view mirror listed at £4.29 on eBay by a seller registered as a UK business in Manchester - the identical product is available on AliExpress for £0.76.

• When a UK buyer places an order on eBay, the seller purchases the item directly from AliExpress, providing the buyer’s UK delivery address.

• AliExpress ships the goods directly from China to a UK address where the item is re-labelled and then forwarded on to the UK consumer. The UK limited company never holds any stock, never imports anything, and never touches the goods.

• The seller retains the margin between the eBay sale price and the AliExpress cost, minus eBay’s fees.

5.  The VAT Black Hole

The arrangement described in 4. above creates a VAT black hole at every point in the transaction chain.

When a consumer buys directly from AliExpress, AliExpress collects and remits UK VAT at the point of sale, as required under the overseas seller rules. But in the dropshipping model, AliExpress is not selling to a UK consumer - it is selling to what appears to be a UK registered business. It therefore treats the transaction as a B2B supply and does not collect consumer VAT. It is also worth noting that even if AliExpress were accounting for import VAT, it would do so only on the lower price it charges the UK limited company, not the higher price that company charges the consumer.

Because the goods are shipped directly from China to the UK consumer with a declared value below the £135 low-value import threshold, no import VAT is collected at the border either.

The UK limited company is not VAT registered - deliberately so. And because eBay sees a UK business seller, its deemed reseller obligations do not apply.

The result: VAT is paid nowhere in the chain. Not by AliExpress. Not at the border. Not by the seller. Not collected by eBay. The UK consumer pays a price that includes no VAT, but the compliant domestic retailer selling the same product must charge 20% on top. The competitive distortion is significant and entirely artificial.

6.  The Warehouse Variant: How the Same Loophole Operates at Scale

The dropshipping scheme described above is not the only way overseas operators exploit the gap in the deemed reseller rules. A related variant operates through UK-based Chinese fulfilment warehouses. Chinese suppliers bulk-import goods into UK warehouses, where stock sits until sold via eBay or Amazon through a nominally independent UK Ltd company. The UK entity is typically a recently formed, single-director company that serves primarily as a marketplace-facing front, while the Chinese supplier retains real control over pricing, inventory, logistics, and profits.

The “Flash Title Transfer” mechanism

The most sophisticated evasion mechanism in this model involves a manufactured just-in-time ownership transfer. The Chinese supplier legally “owns” goods while stored in the UK. When a customer buys on eBay from the UK Ltd company, ownership is transferred milliseconds before dispatch: the Chinese supplier “sells” to the UK Ltd company which then immediately “sells” to the customer, and the UK warehouse ships the item. This creates the appearance of a purely domestic transaction, attempting to sidestep the Fulfilment House Due Diligence Scheme (FHDDS), which requires registration when storing imported goods in the UK on behalf of non-UK established persons.

HMRC and marketplaces are aware of these “flash transfer of title” models and apply “substance over form” and economic reality tests rather than simply accepting contractual paperwork. Key questions HMRC would ask include: Who imported the goods and paid import VAT? Who bears inventory risk on unsold stock? Who controls the eBay account and handles refunds? Where do profits ultimately flow? A UK Ltd company that cannot answer these questions independently is likely treated as an accommodation entity, with the overseas supplier regarded as the true principal.

The “Burner Company” pattern

The same operational pattern seen in the dropshipping scheme appears here too. Hundreds of near-identical UK Ltd companies formed within the last 12 months, each with a single director holding overseas connections and UK residency, appear to be trading on eBay at pricing levels that are impossible to sustain if VAT is being properly collected and remitted. The threshold cycling pattern - dissolving companies before they file a first return and opening new ones to replace them - means aggregate turnover remains permanently invisible to HMRC’s compliance systems.

Why enforcement is difficult

Many cases settle quietly, are handled through civil compliance interventions, or see marketplace and warehouse operators terminate arrangements before litigation. The UK company structure provides a layer of deniability, and by the time HMRC acts, the company may already be dissolved with no assets to pursue. The FHDDS was created specifically to close these loopholes, and digital platform reporting rules now require marketplaces to share seller identity, sales volumes, and earnings data directly with HMRC, making anonymous operation significantly harder going forward. These are useful measures. But they address the symptoms rather than the cause. The warehouse variant, like the dropshipping scheme, exists because the deemed reseller rules stop halfway. Extend them to cover all marketplace sellers regardless of registration status, and the incentive to construct these arrangements disappears entirely. This is precisely the gap the rules have failed to close.

7.  Threshold Cycling: How the Anti-Disaggregation Rules Are Being Defeated

HMRC’s VAT legislation does include anti-disaggregation rules, designed to prevent connected persons from artificially splitting their turnover across multiple entities to stay below the £90,000 VAT registration threshold. In theory, these rules should catch the behaviour described in this blog.

In practice, they are failing to do so, for several reasons:

• The companies are set up to appear unconnected on paper. Different registered addresses, different directors, no shared ownership visible at Companies House.

• The beneficial owner is overseas and difficult for HMRC to trace or pursue through normal compliance channels.

• The intermediaries who set up these companies are specifically engineering the corporate separation needed to defeat anti-disaggregation analysis.

• Companies House and HMRC do not have effective joined-up real-time data sharing to identify patterns of connected company formation.

• By the time HMRC might identify the scheme and begin an investigation, the company has been dissolved or abandoned, and a new one is already trading.

The threshold cycling approach - run a company to just below £90,000, dissolve it or simply stop trading through it, and open another - means that no single company ever triggers HMRC’s registration thresholds, no VAT return is ever filed, and the seller’s aggregate turnover remains permanently invisible to the tax system. eBay appears to be the worst offender for hosting this trade.

8.  The Maginot Line: A Policy Analogy

The Maginot Line was an impressive defensive structure: formidable and well-resourced. It failed not because it was poorly built, but because it only went halfway. The enemy simply went around the end of it. HMRC’s deemed reseller rules share the same fundamental flaw.

The completed half of HMRC’s wall - the deemed reseller rules applied to overseas sellers - works well. Marketplaces collect and remit VAT on those sales. But the unbuilt half - the absence of equivalent rules for UK-registered sellers - has left a gap wide enough for a procession of bogus limited companies to march through carrying their untaxed goods, heading straight for the UK consumer market.

The scheme works not because of the ingenuity of those running it, but because of the incompleteness of the policy and the failure of Companies House to prevent it.

9.  The Complexity of Establishment Status: HBS Enterprises Ltd v HMRC [2026]

A recent tribunal decision, HBS Enterprises Ltd v The Commissioners for HMRC [2026], illustrates a further dimension of the problem with the current establishment-based rules, and does so from an unusual angle. Rather than involving an overseas seller falsely presenting as UK-established, the case concerned a genuine UK business that had been wrongly classified by HMRC as a Non-Established Taxable Person (NETP).

HMRC’s own NETP Indicator Team had incorrectly flagged the seller on its internal systems, with the result that HMRC’s VAT checker website was displaying the seller’s address as the Aberdeen “Ruby House” office used for NETP registrations. Amazon, carrying out its own due diligence as required under the deemed reseller rules, relied on that data and treated the seller as an NETP, collecting and remitting VAT on all its UK sales accordingly.

The tribunal ruled that administrative errors by either HMRC or Amazon do not override the underlying statutory obligation, though they may give rise to separate remedies. There is also a noteworthy side point: the seller was apparently aware of the misclassification but, since VAT was being collected in any event, did not consider it a problem at the time.

What the case starkly demonstrates is the unnecessary complexity that flows directly from the establishment-based structure of the current rules. Both platforms and HMRC are required to determine whether any given seller is UK-established, a determination that, as this case shows, even HMRC itself can get wrong, with significant knock-on consequences for the platform when it carries out its own compliance checks in good faith.

This blog has focused predominantly on the reverse problem: the thousands of cases in which NETPs exploit the rules by falsely presenting themselves as UK-established sellers. HBS Enterprises is an unusual case because it runs the other way. But both scenarios share a common root cause: a system that makes establishment status the pivotal trigger for marketplace VAT obligations. Remove that trigger, by extending deemed reseller rules to all marketplace sales, and both problems disappear simultaneously.

10.  The Government’s Position: Why It Falls Short

RAVAS has been shown two letters signed by Dan Tomlinson MP, Exchequer Secretary to the Treasury, that set out The Government’s official position on the current operation of the rules. The letters, dated April and May 2026, confirm the current framework and the Government’s assessment of it, but they also reveal exactly why the current approach is insufficient.

The Government’s stated position

The minister’s April letter characterises the 2021 rules as having created “a level playing field” for UK retailers and states that HMRC takes “a risk-based approach” to ensuring OMPs apply the rules correctly. It confirms that HMRC can assess OMPs for underdeclared VAT where they have failed to take all reasonable steps to determine a seller’s establishment status, and that further guidance was published in June 2025 to assist platforms with those checks.

The May letter goes further in several important respects. It confirms that OMPs are not legally required to apply any specific checks to determine seller establishment; they face liability only if they get the classification wrong and cannot show they took reasonable steps. It also confirms that HMRC cannot tell OMPs what checks to carry out. Most strikingly, it explicitly acknowledges that self-certification alone is not sufficient to prevent abuse. The Government’s response to that acknowledged insufficiency is to continue carrying out compliance activities and raising assessments when non-compliance is identified.

On the question of enforcement, the May letter reveals that HMRC does not even hold a central record of how many OMPs have had assessments or penalties raised against them. The reason given is that OMPs operate across a wide range of sectors and trade classes. This is not a convincing explanation for the absence of basic enforcement data on what is, after all, a specific statutory liability introduced in 2021.

The picture is reinforced by parliamentary questions tabled by Ben Lake MP in May 2026, answered by Dan Tomlinson on 27 May. Mr Tomlinson confirmed that HMRC does not typically reconcile Bulk Import Reduced Data Set (BIRDS) import declaration data with online marketplace order data, VAT returns, or Customs Declaration Service data. He confirmed that HMRC cannot identify how many BIRDs declarations were associated with newly incorporated or subsequently dissolved companies, because the information is not available. He also confirmed that HMRC does not systematically record data on how many BIRDs-authorised traders have had their authorisation suspended, withdrawn, or referred to the Fraud Investigation Service. On the same date, HMRC disclosed that the declared trade value of goods imported under BIRDs had risen from £0.4 billion in 2022 to £7.8 billion in 2025, across 394,000 declarations, while simultaneously confirming it holds no estimate of the VAT that should have been collected on those imports, nor of the VAT actually remitted. The data gap is not a side issue. It is the mechanism by which the evasion persists.

Why this position is flawed

The minister’s assertion that the rules create a level playing field is simply not borne out by the evidence. HMRC’s own best estimate, published in the NAO report, puts VAT losses from overseas sellers misrepresenting themselves as UK-established at £150 million per year — a figure that covers only 2022/23, counts only this one evasion method, and almost certainly understates the true loss. Independent analysis commissioned by Amazon puts the total annual value of UK marketplace sales by bad actors at up to £3.2 billion, implying a VAT loss of up to £640 million — consistent with Amazon’s own estimate that extending deemed reseller rules to all sellers would raise £700 million a year for the Exchequer.

A level playing field does not lose between £150 million and £700 million a year to a single, well-documented fraud. It is also worth noting that official estimates in this area have consistently proved unreliable: in 2017 HMRC estimated joint and several liability rules would raise £350 million annually; HMRC subsequently confirmed to RAVAS that the 2021 deemed reseller rules alone raised £1.4 billion in 2021/22. The OBR projection that the rules will raise £1.8 billion per year by 2026/27 should not be read as evidence of success because it reflects VAT being collected on sales previously entirely outside the tax net. The question is not whether the rules raised something, but whether they raised everything they should have. The loss figures suggest the answer is no.

The reliance on a risk-based compliance approach is understandable as a general principle of tax administration, but it is plainly not working here. The scheme described in this blog has been operating at scale for years: cheap UK limited companies obtained for £20, intermediaries openly advertising on Facebook, paper entities hiding their real overseas control, companies cycling through VAT thresholds and dissolving before filing a single return. If risk-based enforcement were producing a deterrent effect, none of that would be possible.

The most telling admission in the April/May correspondence is that HMRC accepts self-certification is not sufficient to prevent abuse, while offering no structural remedy. The Government’s answer to a known, quantified, ongoing failure of self-certification is more guidance and more case-by-case compliance work. Useful perhaps at the margins, but nowhere near sufficient to address a problem operating at this scale.

The Government’s letters do confirm that work is continuing to look at reforming the current rules and refers to the announcement at Tax Update April 2025 that the Government is “exploring the merits and value of further reform.” That is welcome, but exploring merits is not the same as acting. Compliant UK businesses are losing trade to VAT-evading competitors today, not at some future point when a reform process concludes. The case for extending deemed reseller obligations to all marketplace sellers, regardless of establishment status, is already well-made. The Government should move from exploration to implementation.

11.  The Only Effective Solution: Extend Deemed Reseller Rules to All Marketplace Sales

There is a straightforward solution to this problem, and it does not require HMRC to chase thousands of individual overseas-owned shell companies, improve data sharing with Companies House, or overhaul the anti-disaggregation rules - though all of those things would be desirable.

The solution is to extend the deemed reseller rules to cover all sales on online marketplaces, regardless of whether the seller is registered as a UK business or an overseas one.

This is not a new idea. In the United States, Marketplace Facilitator laws have required online marketplaces to collect and remit sales tax on all sales they facilitate - regardless of whether the seller is domestic or out-of-state - for several years and are widely regarded as a success. The UK applies the same logic only to overseas sellers. Extending it to all sellers is the logical and overdue next step.

If eBay, Amazon and other marketplace platforms were required to collect and remit VAT on every transaction they facilitate - not just those involving overseas sellers - the seller’s registration status would become irrelevant. It would not matter whether the beneficial owner was in Manchester or Lahore, whether the company was genuine or a shell, or whether it was approaching its VAT threshold or nowhere near it. VAT would be collected at the point of sale on every transaction, by the platform, every time.

Extending the rules to all marketplace sellers would do more than simply close this loophole:

• It removes the incentive to create bogus UK companies for VAT avoidance purposes entirely, since the company’s UK registration would no longer confer any VAT advantage on the seller.

• It eliminates the administrative burden on small but legitimate UK marketplace sellers, who would no longer need to manage their own VAT threshold monitoring in the same way. It is widely acknowledged that accounting for VAT using Online Market Place reporting is time consuming and often results in unintentional errors.

• It creates a level playing field between marketplace sellers and high street retailers, all of whom already have VAT collected at the point of sale.

• It is enforceable. Platforms are large, regulated, UK-based entities. Individual shell companies are not.

• It is consistent with the direction of travel in other jurisdictions. The EU’s VAT in the Digital Age (ViDA) reforms are moving towards full platform liability for VAT collection, and US Marketplace Facilitator laws, which require exactly this, have been in place for several years and are widely regarded as a success.

• It eliminates the arduous analysis currently required to reconcile complex OMP sales reporting in VAT returns, removing a compliance burden that error-prone and time-consuming for compliant sellers and that can cause considerable hardship when errors are discovered only when HMRC comes calling.

The argument against full deemed reseller status for all marketplace sales has historically been complexity and the compliance burden on platforms. But the largest platforms already have the technical infrastructure to collect and remit VAT on overseas seller transactions. Extending that obligation to all transactions is an incremental step, not a fundamental one. The complexity argument has never been weaker.

12.  UK Businesses and Amazon Want to See VAT Collected by Online Marketplaces

In April 2026, RAVAS was a signatory to a letter to Dan Tomlinson MP, Exchequer Secretary to the Treasury, calling for VAT Deemed Reseller Rules to be extended to all sellers as a matter of urgency. The letter was also signed by:

•                Association of Chartered Certified Accountants

•                Association of Cycle Traders

•                British American Business

•                British Chambers of Commerce

•                British Retail Consortium

•                Chartered Institute of Taxation

•                Dan Neidle, Tax Policy Associates

•                Entertainment Retailers Association

•                Enterprise Nation

•                Entrepreneurs Network

•                Institute of Chartered Accountants in England and Wales

•                Institute of Directors

•                Logistics UK

•                National Association of Jewellers

•                Radio, Electrical and Television Retail Association

•                Retail Sector Council

•                UK Warehousing Association

Amazon have also called publicly for deemed reseller rules to be extended. I am somewhat surprised that The Federation of Small Businesses has not signed this letter or publicly stated its position on this issue.  eBay has remained silent on the matter, which I find difficult to explain given the scale of the problem visible on its own platform.

The loophole being exploited is not obscure or technically complex: it is being openly advertised on social media. Every day the rules remain limited to overseas sellers is another day compliant UK businesses are undercut by competitors paying no VAT. The Government should not continue to expect that half a wall will do the work of a whole one.

13.  Conclusion: Finish the Wall

The evidence set out in this blog points in one direction. The 2021 deemed reseller rules were a genuine advance. They brought large online marketplaces into the VAT collection chain for the first time and raised significant revenue that was previously lost entirely.

But the rules were built on a distinction that has proven impossible to police reliably: the distinction between UK-established and overseas sellers. That distinction has been exploited at scale by overseas operators using bogus UK limited companies. It has generated costly litigation, as the HBS Enterprises case demonstrates, even when the classification error runs the other way. It has been acknowledged by the Government’s own minister to rest on a self-certification process that is not sufficient to prevent abuse and it has left £150 million a year, by HMRC’s own conservative estimate, draining from the Exchequer through a single well-documented evasion route.

The solution does not require new technology, new international agreements, or a fundamental redesign of the VAT system. It requires extending an obligation that already exists, and that the largest platforms already fulfil for overseas sellers, to cover all sellers on all transactions. The US has already done it. The EU is moving in the same direction. Across the industry the consensus is that the current rules need to go further. The Government says it is exploring the merits but the merits have been explored and the case is made. What is needed now is action.