Taxing online sales the VAT split payment model

09 March 2017

David Wilson

In its drive to stamp out VAT evasion and avoidance by businesses selling goods to UK consumers via online marketplaces, the government has announced its intention for HMRC to be able to extract VAT directly from transactions at the point of purchase – what’s often referred to as the ‘split-payment’ model.

Under a typical split-payment model, the customer is expected to pay any VAT due directly to the tax authorities rather than the vendor.

Although details will not be released until publication of the Finance Bill, the government’s intention seems to be to collect any VAT due at source; that is, by using technology to identify and collect any VAT due as soon as the consumer makes a purchase.

This is the latest measure in tackling avoidance by traders using online platforms, and closely follows last year’s announcement which:

  • gave HMRC strengthened powers to direct the appointment of a VAT representative for overseas traders;
  • gave HMRC the flexibility to seek a security from these overseas businesses selling goods in the UK via online marketplaces; and
  • confirmed the joint and several liability of operators of these marketplaces where VAT due has not been paid.

Although there is little doubt that the proposed split-payment mechanism will close VAT loopholes, it may cause some controversy, particularly if it is likely to impact business with a UK supply chain. These suppliers will be incurring VAT on their own purchases and, since they would not be receiving the output VAT on their own supplies, the split-payment model could create a cash flow problem given that they would not be in a position to recover their own input tax credits due from HMRC until the submission of their periodic VAT returns.

One final thing: a split-payment model is contrary to the key principles of the EU VAT system whereby VAT due by the supplier is offset against VAT incurred by him throughout the supply chain. As derogation from the European VAT Directive, this anti-avoidance measure will require the approval of the European Commission. However, as the proposal would be seen as aimed at tackling avoidance and evasion, it is likely to go through ‘on the nod’.

For more information please get in touch with David Wilson, or you usual RSM contact.