In December 2024 the Public Accounts Committee conducted a hearing into Tax Evasion in the Retail Sector. RAVAS made a detailed submission to this hearing relating to Online Retail which can be read here.
Given the state of the UK Government’s finances and the various controversial fiscal measures that have dominated the media recently, it seems to me that simply collecting tax, that is already due, would be a sensible and welcome policy choice. Since 2009 RAVAS has campaigned for measures that have brought in well over £1.8 billion per year from online retail, but there is still much more that the government can and should, do.
Online Market Places (OMPs), upon which so much of the UK’s online retail takes place, remain the focus of lacunas in the law and flaws in procedures governed by Companies House and HMRC. These loopholes are losing the Nation hundreds of millions of pounds per year yet they could easily be addressed by making OMPs collect VAT on all of the sales that they facilitate, not just some of them as is the case today.
The positive impact of introducing a blanket VAT collection obligation on OMPS would extend far beyond tax, leveling the competitive playing field so that that law-abiding businesses are not put at a disadvantage, having to compete with those who evade tax. This, in turn, would protect UK employment and prevent other losses such as corporation tax and unemployment benefits. The UK Treasury should be protecting UK businesses from abusive competition that is reliant on tax abuse and tax loopholes. It is a cornerstone of fiscal governance.
The December PAC hearing followed the 2024 National Audit Office Report Tackling Tax Evasion in High Street and Online Retail which continued from the 2016 report Investigation into Overseas Sellers Failing to Charge VAT on Online Sales
RAVAS contributed significantly to both reports indeed RAVAS, along with VATFraud.org can claim to have kick started a serious examination of these issues in 2015 with a media campaign that culminated in a BBC Radio 4 investigation, a Panorama Investigation (The Billion Pound VAT Scam) and a front page of The Financial Times. Up to that point, despite what HMRC might claim, the issue was being ignored, as was the case with The Channel Islands VAT Loophole that RAVAS shut down in 2012.
Since 2015, despite a snail like pace, progress on ending competitive tax abuse has been made, not least the introduction of the rules in 2021 that make OMPs responsible for collecting VAT from sellers who are not established in the UK. The introduction of these rules has seen an increase in VAT collection of £1.5bn a year which contrasts with HMRCs estimate of £300m a year. HMRC have been asked a number of times why their estimate was so far off the actual figure. Their initial response was less than satisfactory, claiming that Covid had caused a fivefold increase in online retail volumes, a claim simply not borne out by the statistics. It was therefore refreshing to hear Sir Jim Harra finally admit to the PAC that HMRC had “imperfect information” although it is worth noting that the dossier handed to HMRC and the National Audit Office by RAVAS and VATfraud.org in 2015 was called The Billion Pound VAT Fraud (also the title of The Panorama documentary in which Jim Harra was interviewed) so the information had been available for quite some time.
The PAC hearing took place on Monday the 16th of December. In attendance were Sir Jim Harra, First Permanent Secretary and Chief Executive, HMRC; Penny Ciniewicz, Director General Customer Compliance Group, HMRC; Dean Beale, Chief Executive, The Insolvency Service and Louise Smyth, Chief Executive and Registrar of Companies, Companies House.
Overall I still do not believe that there is an understanding in Government as to how tax abuse in Online Retail operates or what the consequences are. If a trader has a price advantage then that trader will set the price against which everyone else has to compete. If that price advantage is due to the evasion or abuse of tax then it will create an incentive for other traders to abuse or evade tax because those traders who do not join in will be unable to compete. This was the case in The Channel Islands where, for six years, a company called Play.com was permitted to obtain a VAT advantage not intended by government policy, resulting in major High Street and Online retailers such as Tesco, WH Smith, Boots, Amazon and HMV being forced to join in by the resultant market distortion. I spoke to both HMV and Amazon in 2006 and neither of them wanted to be retailing from The Channel Islands, but they had to do so in order to compete.
The Government needs to understand that where there is a potential for abuse or evasion then if no preventative measure is taken the market will adjust accordingly. Price is always king in online retail. For this reason, policies need to be smart, proactive and watertight in preventing abuse and evasion. If they are not, then they will leak and the marketplace will be distorted in favour of bad actors. Any policy for Online Retail that does not account for the impact of a known loophole is doomed to fail in the longer term. Neither is it just a Chinese problem. It is in the main a Chinese problem because pretty much everything is made in China but RAVAS has been approached by Chinese sellers who want to pay taxes but who are facing Chinese competitors that cheat the system. As was the case in The Channel Islands they are forced by the market to join in.
Jim Harra stated that HMRC's mantra is "Promote, Prevent, Respond". There is however no evidence that HMRC are proactive with regards to either preventing or responding to non-compliance in online retail. My long experience is that HMRC do not act unless pressured by Parliamentary scrutiny and the media.
Confirming this approach Jim Harra stated that there is no strategy to prevent evasion, and gave no meaningful answer as to why one does not exist. He said that HMRC would 'keep under review' this position but in my experience keep under review is a euphemism for doing nothing. Yet at the same time Jim Harra said there was "no level of tolerance for evasion" a statement that appears to be difficult to square with the admission that there is no strategy for preventing evasion.
Jim Harra further claimed that the issue of non-UK companies using fake UK establishments was a minor one and that the majority of those involved had been dealt with by OMPs. Based upon what I have seen and HMRCs track record to date, I am not convinced.
As noted in the RAVAS submission, OMPs are expected to police the establishment of a business yet through no fault of their own, are not in a position to do this effectively, today. This is because the law has been designed to outsource tax collection to OMPs, even though they have less access to reliable information and no legal powers to compel compliance, compared to HMRC/Companies House. The evidence, such as the 11,000+ letters to the flat in Cardiff, speaks for itself here; as does the fact that HMRC felt the need to retrospectively carry out due diligence on a large number of VAT registered businesses in 2024.
An HMRC spokesperson in a Times article said that “if VAT fraud was detected” they could “pursue online marketplaces for the unpaid VAT” but this is misleading. If an OMP acts in good faith and takes reasonable steps in its due diligence on sellers, but the seller ends up having fraudulently misrepresented their establishment, HMRC cannot assess the Market Place for unpaid VAT (see end note). HMRC hasn’t yet issued guidance on what constitutes ‘reasonable steps’ but, regardless of where the bar is set, fraudsters will find loopholes that make any practicable due diligence process ineffective, leaving the Treasury and not Market Places bearing the unpaid VAT. I have seen examples myself of the lengths overseas businesses will go to in order to evade VAT – setting up shell companies, forging documents etc.
Deemed reseller rules as applied to sellers established outside the UK, have been a great success in terms of revenue collection but the NAO report suggested that HMRC could boost that £1.8 billion by 10% overnight by extending Online Market Place VAT collection rules (£150m was the estimate of VAT fraud by overseas sellers trading fraudulently on marketplaces as established UK sellers). As noted previously HMRC significantly underestimated what the rules would collect before their introduction (£300m estimated vs £1.5 billion actual) and I wouldn’t be surprised if £150m was also a major underestimation and, of course, that £150m doesn’t include benefits in terms of eliminating VAT underpayment by genuinely UK businesses (which I suspect is very high).
Furthermore the ability of OMPs to police establishment is being impeded considerably by HMRC and Companies House allowing VAT registrations and Company incorporations without checking ID or verifying addresses. In effect both HMRC and Companies House are giving credence to fraudsters.
In the PAC meeting Louise Smyth, Chief Executive and Registrar of Companies at Companies House addressed the issue of ID verification. She noted that address verification was not included in the recent changes to company registration legislation because it was felt that such checks would be a "burden to businesses". This is nonsense more so given the fact that Anti Money Laundering legislation already requires ID and address verification where banks and payment service providers are involved. Furthermore, OMPs are expected to act as police and ensure that overseas sellers are not pretending to be established in the UK. To do that OMPs have to check address and ID information for sellers (although the OMPs do not have access to the same insight that Companies House or HMRC would have as government departments). This has almost certainly put a burden on the OMPs and those businesses who are being asked to verify the information that they provide. Furthermore the rules as they stand make it it easier to set up a seller account on a UK marketplace if you’re an overseas business than if you’re a UK company (because the OMP is less concerned with verifying your place of establishment). Even worse in 2024 a number of legitimate UK businesses had their accounts frozen for weeks whilst OMPs carried out checks on their place of establishment so I struggle to take the concerns about the burden on business seriously. I suspect the decision is more related to the burden on Companies House and HMRC.
Of course the real burden on business is market distortion caused by loopholes in the tax system that could and should be plugged. This burden on businesses is made worse by Companies House and HMRC not doing any verification earlier in the process thus weeding out fraudulent registrations and incorporations at the earliest possible stage. As highlighted in the press 30,000 companies with Chinese directorship/ownership registered in the UK this year and many are questionable. I do not believe that verifying ID and address information is either a burden or onerous and since AML requires address and ID verification, it is not new either. A verification of ID and address information should be carried out the moment anyone requests either a company or a VAT number and information about company incorporation and VAT registration should be made public on a single database. To not do so in my view is negligent. If OMPs are required to police this issue they should also not have to deal with bogus companies and VAT registrations signed off by HMRC and Companies House.
Louise Smyth noted that Companies House can take action against companies "that we think are conducting fraudulent activity" but the problem is Companies House manifestly do not recognise when a company is carrying out fraudulent activity. The fact that only seven people have been prosecuted for creating companies and then artificially closing them with the sole purpose of defaulting on their debts and avoiding their liability to tax (phoenixism) is proof of this. A more positive tone was struck when Louise Smyth appeared to row back on the 5-10 year estimate for creating an integrated data base shared by HMRC and Companies House, although the idea of an initial “voluntary ID” is frankly silly and I refer back to existing AML regulations.
In any event collecting VAT after the fraud event does not address the market distortion caused by the abuse. Only when VAT is included in the sale price of every item will market distortion be prevented. That is why RAVAS is of the view that extending VAT collection by OMPs from non-UK sellers to all sellers is the only measure that is capable of ending both VAT evasion and market distortion.
Finally at the start of the PAC meeting Jim Harra partly addressed the issue of the address in Cardiff that was being used by thousands of Chinese companies. The Cardiff address was also mentioned during the meeting with various assurances given by Jim Harra that no fraud had taken place. Whilst I can understand that HMRC might well be reluctant to discuss any ongoing investigation the facts are that Chinese sellers are abusing the marketplace VAT collection rules, the £135 import VAT and duty exemption, under declaring the value of goods and defaulting on VAT and Import duty using paper entities set up in the UK that have no substance. HMRC are trying to recover unpaid VAT and duty from UK Companies (like freight forwarders) who have unwittingly been caught up in these scams. The PAC was not given this information by Jim Harra.
I am hopeful that the Government will look at this issue again and realise the many benefits of extending VAT collection by OMPs to all sellers. To suggest that the rules as they stand have resolved the problem of tax evasion, abuse and market distortion is a claim that cannot in my view be substantiated by the facts.
End Note : The law currently says, “the [marketplace] operator is not liable for any amount of VAT in excess of the amount paid… provided that the [marketplace] operator took… all reasonable steps to ascertain… the place of establishment of the person making taxable supplies facilitated by the online marketplace”. Note, ‘all reasonable steps’ is a term without any precedent in VAT law and, per the recent NAO report, HMRC hasn’t issued any guidance on how an OMP should meet this test.
Richard Allen
Comments