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Automated VAT checks will be imposed by HMRC on foreign sellers

In an effort to combat fraud, HMRC has informed tax directors that it will impose automated assessments on online sellers with inaccurate VAT returns.

Business consultants applaud HM Revenue and Customs' choice to levy automated assessments against foreign online vendors who attempt to commit fraud by filing false VAT returns.

ITR obtained the communication that was sent to businesses and trade representatives informing them of the new regulations that will take effect on September 1.

The government is attempting to crack down on VAT fraud and non-payment by foreign vendors who sell goods to UK consumers.

The rule is unlikely to have a significant effect on companies that are engaged in legitimate trade and properly filing their VAT returns, according to Andrew Bohnet, managing director of Innovate Tax, a tax automation and technology company with headquarters in the UK.

According to Bohnet, the main goal of this is to catch up with the enormous number of foreign suppliers who attempt to game the system and widen the VAT gap.

According to Richard Asquith, CEO of VAT Calc, an international VAT/GST reporting and calculations company in the UK, VAT leakage by overseas sellers of goods has been an ongoing battle for HMRC and has been made worse by Brexit.

This has led to online traders from the EU who had previously benefited from free movement of goods in the single market being reclassified as overseas sellers in the UK.

According to Asquith, "What they’re saying now is that if you haven’t provided enough information [on your VAT return] or if you’re being vague and it looks like you were selling [to UK consumers] before your VAT registration, they’ll just lump an assessment on you and then contact the marketplaces that you’ve been selling on to get them to block you."

According to Harry Staight, spokesperson for Amazon in the UK, the government's initiative to ensure VAT compliance by third-party sellers has received consistent support from the online marketplace.

According to Staight, "We require all sellers to comply with their VAT obligations and provide low-cost and simple tools for third-party traders to register, report, and remit VAT."

The HMRC initiative is intended to provide a powerful disincentive for sellers to skimp on compliance while continuing a trend of tightening VAT regulations.

To combat online VAT fraud, which was estimated to have cost up to £1.5 billion ($1.8 billion) in 2017, the UK has been gradually implementing a sliding scale of measures.

VAT leakage on imported foreign e-commerce goods into the UK has been particularly severe. This has typically involved non-resident sellers who underreport collections, fail to charge VAT on their sales, or completely ignore any VAT obligations to HMRC.

Asquith asserts that the new regulation is one of the strongest ones the tax authority has ever put in place, saying that "There's nothing like a tax assessor to get people to get their affairs in order."

Up until December 2022, HMRC will have the authority to assess sellers in the past four years retroactively.

Additionally, it will have the authority to send notifications of unpaid VAT to marketplaces that sellers have used. Marketplaces have the power to freeze the accounts of traders who break tax laws while also being jointly or individually liable for any unpaid VAT.

HMRC has taken a number of actions to try to level the playing field with high street retailers and bring foreign marketplaces and sellers into compliance with UK tax laws.

For UK transactions involving their third-party sellers, the tax authority made marketplaces subject to UK VAT liabilities in 2017. This was the case if the online marketplace knew or ought to have known that the vendor needed to register for UK VAT.

According to Asquith, this measure forced major marketplaces like Amazon and eBay to verify that the sellers using their services had valid UK VAT numbers.

According to Asquith, "that was very  effective and got about 60,000 Chinese sellers to register for VAT in the UK for the first time."

In 2018, the authorities added monitoring and a voluntary agreement on the exchange of seller data to the regulations.

When the UK VAT obligations of marketplaces were expanded to include some sellers' international transactions in January 2021, HMRC further widened the rules. This meant that if the goods did not cost more than £135, all non-resident sellers had to add VAT to any sales to UK customers.

There are steps businesses can take to ensure they are compliant with UK VAT requirements, and the most recent regulation is a step in the right direction toward closing the net around VAT fraudsters and non-compliant sellers.

Matthias Luther, associate partner for indirect tax at EY in Hamburg, advises clients to implement automation software and review their VAT management and reporting procedures in order to ensure that they are in compliance with the UK regulation.

"They should appeal if they receive an automated tax assessment," according to Luther.

This is the same opinion held by Bohnet, who claims to constantly advise clients to automate their VAT calculations in order to reduce the possibility of human error in manual processes.

It appears that the UK tax authority has its sights set on goals that go beyond the most recent effort to close the VAT gap.

 According to Asquith, "They are looking at getting [enforcing regulations against] anyone else who helps foreign sellers promote their business in the UK. This could include a wide range of people who help with online marketing, pay-per-click advertising services or delivery firms." 

He claims that these service providers could be held accountable for spotting and informing HMRC of any suspicious activity, including the illegal import or export of goods.

It appears that the tax authority wants to catch more companies in the online goods supply chain by expanding the scope of the VAT compliance net.

Luther expresses concern that some sellers may decide to leave online marketplaces as a result of the increased compliance burden.

According to Luther, an increasing number of online sellers will try to sell goods through their own online shops rather than through platforms.

Bohnet observes that markets are not just standing around doing nothing.

"We are seeing workarounds already where some marketplaces are changing the way they operate to try and push the liability back to the original vendor."

Platforms have done this by altering how transactions are completed. According to Bohnet, it is anticipated that more marketplaces will look for ways to avoid rules.

According to Asquith, HMRC is looking into ways to put more pressure on online retailers to adhere to VAT regulations and boost tax collections.

"The other big measure that HMRC is looking at is making payment service providers responsible for withholding VAT on payments between a UK consumer who has bought goods online and overseas sellers."

This could apply to wire transfer processors as well as payment service providers like credit card companies, e-wallet providers, PayPal, and bitcoin exchanges. Asquith estimates that it might take at least a year or two before these measures are put into effect.

Whatever HMRC decides in regards to future regulations, it is evident that non-resident online merchants and fraudsters are coming under a tighter VAT compliance net.

One wonders if businesses might be tempted to pass the additional costs on to customers as stricter enforcement measures increase the compliance burden on businesses.


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