Online VAT fraud typically takes place when non-EU traders sell into the UK via online marketplaces without charging tax 

HM Revenue and Customs has thus far come up with no more than a “dismal” response to an online VAT fraud problem that is costing UK taxpayers more than £1bn a year, the Public Accounts Committee has found. 

Amazon and eBay were also criticised in a PAC report that concluded that the online giants and their smaller rivals have continued to “profit from people who are defrauding the British taxpayer” while failing to properly address the issue of VAT fraud. 

Such fraud occurs, in the main, when traders based outside the EU fail to charge VAT on goods and services sold in the UK via online marketplaces. Customers are rarely aware when this fraud takes place on purchases they have made, the report said.

HMRC estimates that, during the 2015/16 year, online VAT fraud deprived the UK of between £1bn and £1.5bn in tax revenue. But the committee said that this figure was arrived at via flawed methods, and fails to take into account other costs, such as the deleterious impact on legitimate businesses.

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PAC claims that HMRC has been slow to act in addressing the online VAT fraud problem and, consequently, has been playing catch-up with fraudsters. The report criticised the department for failing to name and shame those that break the rules. While HMRC does not directly prosecute offenders, but rather helps the UK's three independent prosecutors to do so, the PAC report noted that it is yet to enact a single successful prosecution against a trader that has committed an offence.

"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,” said PAC chair Meg Hillier. “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.”

An HMRC spokesperson said: "The UK has led the way in holding online marketplaces jointly liable for VAT evaded overseas.We introduced tough new rules last year allowing us to hold online marketplaces liable for unpaid VAT by overseas sellers and since then we have seen a tenfold rise in the number of sellers registering for VAT. The new reforms will secure an extra £875m in tax to help pay for vital public services.”

Shopping offenders
The online marketplaces via which fraudulent traders sell their wares were also criticised by the committee, with Amazon and eBay singled out as the most prominent examples of companies that ought to do more to tackle online VAT fraud. The report noted that, while the problem persists, the two firms and their rivals continue to profit from commission payments on sales by fraudsters – otherwise known as ‘bad actors’.

“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,” Hillier added. “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.”

She added: “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."

An Amazon spokesperson said: “We are reviewing the committee’s recommendations and support efforts to ensure businesses and individuals selling across all marketplaces are VAT-compliant. We offer extensive information, training and tools to assist sellers in their VAT obligations, and we work closely with HMRC on this matter sharing all requested data on non-EU sellers and promptly removing any seller they inform us is not VAT compliant.

An eBay spokesperson added: “As a pioneer in e-commerce, we’ve created a leading global marketplace that empowers tens of millions of entrepreneurs around the world, enabling them to trade, grow and contribute to the economies of their countries. Our business operations are regularly reviewed in close detail and we’ll continue to work closely with tax authorities in every market, while supporting the economic growth of the businesses who rely on eBay.”

The government claims that the UK is the first country in the world to enact legislation making online marketplaces jointly liable for VAT losses. Since the power to enforce these laws came in, it is understood that additional VAT liability reported by online traders has rocketed from the 2015 figure of £6m to a total of £27m last year - a figure which the government expects to increase again in 2017.