The Chancellor has announced a package of measures to give HMRC stronger powers to collect VAT from overseas businesses who sell goods online to UK customers. Failure to pay VAT in these circumstances is estimated to have cost HMRC between £1 and £1.5 billion last year, and creates a distortion against UK businesses selling similar goods.
The measures will come into effect from the date of Royal Assent of the Finance Bill 2016 and are directed at two key areas:
- Amending existing legislation to allow HMRC to:
- compulsory register an overseas business for VAT
- direct that a UK established VAT representative of the overseas business must be appointed, and / or
- require security from the overseas business, and
- Introducing new legislation to enable VAT to be collected from the online marketplace on which the overseas business offers goods for sale.
In both cases, the VAT representative and the online marketplace (as appropriate) may be held jointly and severally liable for any unpaid VAT (alongside the overseas business), therefore providing a financial incentive for these parties to ensure that the overseas businesses with which they have commercial relationships properly account for VAT. There is also a consultation paper published on what further measures are needed to counteract VAT avoidance by overseas sellers of goods.
However, the legislation is tempered somewhat by HMRC guidance issued alongside the new measures, suggesting that HMRC will only invoke these powers in respect of the most non-compliant overseas businesses, being those that continually breach VAT rules or where the non-compliance poses a significant risk to VAT revenue.
Further, where HMRC identifies non-compliance, it will in the majority of cases adhere to the following escalation procedure:
- Making contact with the overseas business to obtain compliance without having to resort to the legislation
- Should the overseas business fail to comply, directing the overseas business to appoint a VAT representative or provide security for its obligations
- Where non-compliance continues, contacting the relevant online marketplace to allow a period of time (generally 30 days) for the marketplace to address the non-compliance, during which time it will not be held jointly and severally liable, and
- Should the online marketplace fail to take satisfactory remedial action, holding the online marketplace jointly and severally liable for the unpaid VAT.
Given the size of the VAT gap caused by VAT avoidance in this area and the potential reputational damage to online marketplaces that could be caused by HMRC collecting VAT directly from them, the industry should be alert to the new legislation and, where necessary, attempt to ensure compliance by overseas sellers prior to any formal action by HMRC. Interestingly, the measures only apply to goods. Services may follow.