The Guardian, BBC and others have covered an unfolding story of massive VAT evasion as a result of distance selling from China (and maybe other locations) into the UK and other EU countries using false VAT numbers or incorrect disclosure of the value of goods on import to evade tax owing in this and other countries.
The story has been disclosed as a result of the work of tireless VAT abuse campaigner Richard Allen. I have seen some of the evidence and it is compelling. Multiple companies appear to be using single VAT numbers and some may not be genuine numbers in the first place. The cost is hard to estimate: it certainly contributes to the massive UK tax gap which the UK's HMRC always refuse to estimate appropriately. The BBC notes an estimate by a trading standards officer that the loss may be as much as £2 billion.
The interesting question is what can be done about this?
First, and most obviously, the question has to be asked as to why such a tiny proportion of trading standards time is dedicated to this task? I gather the sum total of people involved may be just one person.
Second, it has to be asked why, if Richard Allen can find this, HMRC could not? Were they willingly turning a blind eye from on high despite suggesting that on line trading is a particular concern, or is it, despite all recent publicity on Low Value Consignment Relief for VAT from the Channel Islands that they have really not learned their lesson on this issue, or could it just be (as I have long argued) they are so under-resourced they could not do anything even if they wanted to? I am hoping it is the latter.
Third, the question then arises as to whether or not the VAT can be recovered. Since it is highly unlikely that customers of either Amazon or eBay knew or even had any reason to think that they were party to VAT fraud UK law as it has stood since 2006 seems to entirely protect them from liability under what is known as the Kittel Principle. This is complex case law that has developed around the pursuit of missing trader fraud, but the BBC note the following comments:
"If the scale of the fraud is as big as the anecdotal evidence indicates, then we could be talking about billions of pounds," said Rita de la Feria, a professor in tax law at Durham University.
She says that under EU law Amazon, eBay and other online marketplaces could be held jointly liable for all unpaid VAT, along with the offending traders, if action was taken against them.
"If you knew that fraud was being committed you are liable," she added. "If you should have known that fraud was being committed, you are liable as well.
"This principle means that someone like Amazon, someone like eBay can be de facto tax inspectors. Legally they are obliged to police this."
I can see where Prof de la Feria is coming from: the obligation to know established in the Kittel Principle is high. Whether it can be extended to Amazon and eBay when they were, presumably making output tax charges to the companies in question rather than claiming deduction for input tax, which is the issue for which the Principle was created is not quite as clear cut, maybe.
An EU opinion does, however, suggest that Amazon's claim to not be required to act as VAT compliance officer for those companies using its platform may not be the defence that they are hoping for. According to the Guardian:
Brussels sources ... insist[ed] EU rules required that customers be informed of seller details before making a purchase. “In practice, for sales via online marketplaces, the information must be provided on the website,” one source said.
If that is the case then the trading platforms may have a difficult case to answer. As HMRC say on the Kittel Principle:
The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who "should have known". Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel.
I stress the point that I have already made that the cases are not directly comparable, but as precedents go that is powerful. Should Amazon and eBay have known some traders using their sites were potentially evading tax, and did their own failure to check their VAT status help this? If so, should they have reasonably known what was going on? And if so, are they liable? The possibility would at least seem to exist.
And if that is the case then at the very least HMRC have a duty to find out. This one may litigate, I think. But there are times when that is the right thing to do, and providing HMRC with the resources to do so in those cases is essential.
I sincerely hope the government do not duck this issue. We cannot afford for them to do so.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Exactly Richard. It is essential that HMRC litigate this because if they win it will deter tax evasion on these platforms….which are most of the market.
eBay is particularly bad at handling VAT. In my business we sell on eBay and have a note to the effect that VAT is included in the price but we have to generate a separate invoice to show this.
It would be very easy to sell stuff on eBay VAT free if we were so inclined . eBay doesn’t care one way or the other if VAT is paid.
There is also a loop-hole re the channel islands. Small orders can be shipped from there VAT free.
I think you need to consider the non distance sellers.
For example, a Chinese company, not established in the UK sends stock to Amazon in the UK. Amazon warehouse and hold the Chinese companies stock in Bedford and fulfil their orders on demand across all EU Amazon sites.
This is not presold distant selling stock in transit. This is UK stock dispatched on demand.
The Chinese seller needs to register for VAT as a NON Established Taxable Person under VAT Regulations VATREG37050.
http://www.hmrc.gov.uk/manuals/vatregmanual/VATREG37050.htm
“NETPs are now required to register from the earliest of the date that they make, or they expect to make taxable supplies of any value in the UK.”
Under EU Electronic Commerce Directive of 2002 — Article 6 (1) (g) – they also need to display VAT numbers online
http://www.legislation.gov.uk/cy/uksi/2002/2013/made
As part of the supply chain Amazon are fulfilling the orders, provide full customer service, returns service and payment service.
The only thing the seller does is send stock to Amazon and takes payments of the sales minus 12% Amazon Fee and Amazon Fulfilment Fee.
On purchasing an item a consumer asks for a VAT Invoice. The NON UK business says “We are not VAT registered”
The consumer contacts Amazon and reports the Seller for VAT Fraud.
Amazon takes no action against the seller and allows them to keep trading on Amazon
Amazon continue to fulfil the sellers orders knowing the seller is NOT VAT registered.
Amazon does not enforce EU Electronic Commerce Regulations 2002
Amazon does not verify the VAT status or VAT numbers of the NON UK businesses.
In this instant were does liability lie?
It would seem you think it lies with the party in the UK knowing it is supplying without VAT being properly charged
But has it been litigated?
The EU say the whole supply chain is liable. But it hasn’t been litigated against Amazon or eBay or any online marketplace.
I have heard DHL have been successfully sued as part of the supply chain.
Amazon’s failure to enforce EU regulations has lead to Amazon.co.uk being the VAT Fraud heaven for NON UK businesses.
Good article. I don’t think the Commission or the UK Government will overtly seek to litigate or attack these trading giants, who would wrap up HMRC in knots.
However, what I do think will happen is that the Commission will have to conclude, just as they did with the marketplaces rules for electronic services, that they can introduce laws that circumvent the legal position as to status by introducing MOSS for goods. This would make eBay and Amazon the seller for VAT.
It would however drag in all of the small sellers too. But in absolute revenue terms, this would surely secure a lot of the VAT gap on these sales?
The EU are already proposing new VAT laws for physical goods – just like the VATMOSS Law fro downloads.
VAT will be paid to each member state the goods are sold in. If a Chinese seller distance sells goods into UK, they will have to register for VAT and pay VAT to UK VAT man.
EU say new laws are pencilled to come into force 2020.
So we only have 5 years of VAT Fraud left
Curious to know on what basis Amazon would wrap HMRC in knots ?
It should be The legal basis for Amazon and E-bay having to ask questions is what is know as the “knew or should have known” fraud test. Established first in the European court Kittel case in the early 2000s, and developed since then in various cases; until earlier this year when the test was transformed by the European Court into a principle, in the Italmoda case. HMRC now need to do what they are supposed to do….
Here is the relevant paragraph from the Italmoda case : para 50 “It must further be noted that, according to settled case-law, that is the position not only where tax evasion has been carried out by the taxable person itself but also where a taxable person knew, or should have known, that, by the transaction concerned, it was participating in a transaction involving evasion of VAT carried out by the supplier or by another trader acting upstream or downstream in the supply chain (see to that effect, inter alia, judgments in Kittel and Recolta Recycling, EU:C:2006:446, paragraphs 45, 46, 56 and 60, and Bonik, EU:C:2012:774, paragraphs 38 to 40).”
What concerns me and should everyone is the millions of pounds being spent and filtered out to China/other countries via eBay or Amazon. So there is No VAT paid on the item, none or tiny amount of Corporation Tax being paid by the eBay/Amazon and that money is not then recycled into the UK economy its gone end off.
Exactly. ebay only show the ITEM location on the listing page, not the business location – so half the time honest buyers don’t even realise they’re buying from a Chinese business, that money is leaving the UK when it should be supporting our small businesses like it did 3/4 years ago before they changed it.
ebay UK is just a way of milking British buyers they don’t care about small British sellers our items are on page 10 in results because of ‘Best Match’, which is basically a corrupt, algorithmic way to put volume sellers first, nearly always Argos or the Chinese. Do a search most items are in the United States China or Hong Kong and its meant to be a UK website.
The interesting thing for me is the differences in sellers that use fulfillment by Amazon.
hmrc seems to agree that the owner of the item is liable for vat on postage.
Yet amazon, through amazon prime has complete control over pricing etc.
If amazon was liable for vat on the postage, most of the problem would involving sellers who use fulfillment and don’t pay VAT would disappear.