HMRC targets online sellers to crack down on VAT evasion

23 January 2024

E-commerce permits online businesses to trade in the UK with little or no establishment in this country. Offshore businesses may not have corporate or personal tax accounting obligations but, unless VAT is charged on sales to UK customers, offshore sellers will gain an unfair advantage over legitimate UK businesses that do fulfil their obligations. Over the years, the government has implemented several measures to ensure compliance with these rules and thus reduce instances of deliberate VAT evasion.

Despite HMRC’s efforts, along with the cooperation of online marketplaces, VAT evasion still takes place by offshore businesses that claim to be UK-based for VAT registration purposes. By claiming a UK establishment, such VAT-registered businesses retain the right to levy (and thus the opportunity to evade) VAT on sales made via online marketplaces. 

In response to this, HMRC has recently announced the latest step in its campaign to stamp out VAT evasion. HMRC will be writing to some UK VAT-registered businesses stating that unless evidence is provided of UK-establishment, they will be treated as non-established, and the liability of sales made via online marketplaces will automatically change.

Of course, many legitimate businesses are also likely to receive this letter and evidencing their establishment may prove time-consuming and expensive if advice is required. This could unfairly complicate the affairs of legitimate businesses and appears to be a stopgap measure introduced in anticipation of the upcoming operating platform reporting rules which require some marketplaces to report sellers’ activity to HMRC. 

While this exercise will be welcomed by UK businesses trying to compete with unfair competition, HMRC will be hoping that the new operating platform reporting rules do away with this type of exercise. Under the new rules, online marketplaces facilitating the sale of goods and some services will be required to conduct due diligence on sellers using their site, then report to HMRC (and the sellers) on the sellers’ activity. The first returns must be submitted by the end of January next year, at which point HMRC will hope that this type of VAT evasion will be a lot harder.