Policy paper

VAT: overseas businesses and joint and several liability for online marketplaces

Published 16 March 2016

What are HM Revenue and Customs (HMRC) doing?

The government has announced changes aimed at tackling VAT evasion through online sales. Two key groups that will be affected are overseas businesses and online marketplaces.

HMRC is strengthening existing VAT legislation for directing overseas businesses that should be registered for VAT in the UK to appoint a UK-established VAT representative and giving HMRC greater flexibility in relation to when it can require some form of security.

To support this, HMRC will also be given new powers to make online marketplaces jointly and severally liable for the unpaid VAT of overseas businesses who are non-compliant with UK VAT rules and using their platforms to sell through.

Why are HMRC doing it?

Online shopping means the average UK consumer can get goods faster and cheaper than ever before. According to a recent British Retail Consortium report, more than 20% of non-food retail spending occurs online in the UK. This growth in online e-commerce has benefitted the wider UK economy but has also left it open to abuse.

Overseas businesses who sell goods (located in the UK at the time of sale) to UK consumers, mainly via online marketplaces, are not always paying the correct VAT and duty to HMRC. These goods are normally shipped to the UK before sale and stored in fulfilment houses close to their final delivery point. These overseas businesses are unfairly undercutting all businesses trading in the UK, abusing the trust of UK consumers and depriving the government of significant revenue.

HMRC’s traditional compliance powers are difficult to apply against businesses based overseas. These measures will provide HMRC with the tools necessary to tackle the overseas businesses who do not comply with UK VAT rules and help level the playing field for all businesses.

How will the changes work in practice?

The changes will provide HMRC with new discretionary powers that will enable HMRC to target non-compliant overseas businesses and take the most appropriate action on a case-by-case basis. HMRC will first identify overseas businesses that are high risk and/or continue to be non-compliant with UK VAT rules.

HMRC will then attempt to secure compliance directly with the overseas business by making contact with them. Where appropriate HMRC will consider whether to:

• compulsorily register the overseas business for VAT in the UK
• direct them to appoint a UK-established VAT representative, and/or
• require an appropriate form of security

Where the overseas business does not comply with HMRC’s directions and/or continues to be non-compliant, HMRC will contact the relevant online marketplace through which the overseas business is trading. It will put the online marketplace on notice that it may be held jointly and severally liable for the VAT in respect of the overseas business’ future taxable sales through that online marketplace. The notice will also set out a period of time (normally 30 days) during which the online marketplace can avoid being held jointly and severally liable either by securing compliance from the overseas business or removing it from its online marketplace. After this period of time, the online marketplace will be held jointly and severally liable if no such action has been taken.

Important points to note:

• in most cases HMRC will attempt to contact and work with the online marketplaces to warn them of any potential joint and several liability notice
• however, where a significant risk to VAT revenue is identified, HMRC may have to act swiftly and issue a formal notice to the online marketplace without warning
• where a VAT representative has been held jointly and severally liable for the VAT due from the overseas business, HMRC will first seek to collect the VAT debt from that VAT representative
• in circumstances where, despite a VAT representative having been appointed, a significant risk to VAT revenue still remains HMRC may proceed straight to contacting the relevant online marketplace

More detail about the legislative changes can be found in the Annex.

Annex: description of legislative changes

Amended power to direct overseas businesses to appoint a VAT representative and to require security from the overseas business to cover its VAT liability

Who will this effect?

This part of the measure may be applied to:

• businesses who are not established and do not have a fixed establishment in the EU, and are selling goods to UK consumers, where the goods are located in the UK at the time they are supplied
• UK VAT Representatives who may be asked by an overseas business to represent it in the UK

What will be the effect of the measure?

The measure will strengthen HMRC’s existing power (contained in section 48 of the VAT Act 1994) to direct overseas businesses that should be registered for VAT in the UK to appoint a VAT representative. The changes will:

• allow HMRC to direct non-EU businesses to appoint a VAT representative who must be established in the UK
• require that the VAT representative be appointed by a specific date
• require security from a non-EU business either in addition to, or instead of, appointing a VAT Representative. (The power to require security from any business making supplies in the UK is already contained in paragraph 4 of Schedule 11 to the VAT Act 1994)
• give HMRC the power to refuse the appointment of a VAT Representative if they do not consider that person to be ‘fit and proper’ (in accordance with criteria to be published at a later date)

When will the measure take effect?

The measure is included within Finance Bill 2016 and will take effect from the date of Royal Assent.

New power to make online marketplaces jointly and severally liable for VAT unpaid by overseas businesses using their marketplace

Who will this effect?

This will apply to online marketplaces that provide a facility for UK consumers to view and place orders for goods being offered for sale by overseas businesses.

For the purposes of this measure, ‘overseas businesses’ means any business that is not physically located in the UK. However, in practice HMRC will only seek to apply the measure in circumstances where overseas businesses do not have a genuine business establishment in the EU.

It will only apply in relation to sales made in the UK for VAT purposes, i.e. where the goods are located in the UK at the time the consumer pays for them or the date they are dispatched to the consumer (whichever happens first).

It will apply regardless of where the online marketplace itself is operated or controlled from.

What will be the effect of the measure?

HMRC will be able to issue a notice to the online marketplace making them jointly and severally liable for the VAT debts of an overseas business in relation to sales made through that online marketplace.

This will apply in cases where the overseas business has failed to comply with its UK VAT obligations. Wherever possible, HMRC will seek to pursue the overseas business and secure its compliance before taking joint and several liability action against the online marketplace.

The joint and several liability notice will allow a period of time (normally 30 days) for the online marketplace to take action to address the non-compliance and thereby avoid any assessment for joint and several liability.

That action may be to remove the non-compliant overseas business from the online marketplace, or alternatively to secure the overseas business’s VAT compliance by other means.

The joint and several liability will only be enforced, by an assessment against the online marketplace, where the controller of the online marketplace has failed to take satisfactory remedial action within the period stated in the notice. Should that situation arise, joint and several liability may be assessed in relation to any sales made by the specified overseas business through the online marketplace from the date of issue of the original liability notice.

When will the measure take effect?

The measure is included within Finance Bill 2016 and will take effect from the date of Royal Assent.