If you’re a small business you’ve probably come across the term ‘omnichannel’ whilst building your business strategy. Even if you haven’t, you’re likely already implementing it.
It would be difficult not to be aware that there is a major problem around online VAT evasion.
From the Mirror’s “VAT evading Chinese firms are wiping out British business”; through the Guardian’s: “UK losing millions in VAT from non-EU sellers on Amazon and eBay” ; to the FT’s: MPs accuse Amazon of being ‘morally complicit’ in sales tax fraud  – it’s fair to say it’s a topic that’s made the headlines.
But what’s it all about? Who is involved? Who is it affecting? And most importantly - is anything being done about it?
Basically, a growing number of overseas online sellers are evading VAT obligations in the UK (and the rest of Europe), allowing them to undercut UK (and EU) traders’ prices by 20% - with grave repercussions on local businesses. The situation has arisen because VAT rules are complex and ill-suited to online selling; so ‘VAT-evaders’ can exploit the system to their advantage.
The legal position
All businesses that hold stock and ship in the UK should be registered for VAT if they have annual sales in excess of £82,000. The problem is, while HMRC can easily identify UK-based companies that need to register from their corporate tax returns, it has no information on online businesses selling in the UK but based overseas. The onus is left to the overseas sellers - and unfortunately, many are not registering, are giving invalid VAT numbers or are ‘appropriating’ VAT numbers belonging to other businesses.
It is obvious from the online profiles of these traders (from the hundreds of customer comments posted each month or the achievement of ‘bestseller’ status) that many are taking are well in excess of £82,000 per annum; they’re simply not bothering with VAT.
And the definition of ‘holding stock and shipping locally’ includes stock held in Amazon warehouses under the Fulfilment by Amazon (FBA) scheme.
The other area being exploited by ‘VAT-evaders’ occurs when overseas online retailers ship to UK buyers from outside the EU. VAT should be applied to their UK sales, irrespective of their turnover, unless the items are low-value (less than £15 in the UK) and are imported in small packages, addressed to individual buyers. A growing number of these traders, however, are under-declaring the value of the items being shipped to fit below the VAT threshold. In a recent article, the Guardian claimed that packages which the [online] customer might have paid €100 [£70] for were coming in through customs with a stated value of €20 [£15], or identified as gifts.
As an indicator of the scale of the problem, HMRC seized about £500,000 of goods in the run-up to Christmas, because they were “not correctly imported”.
Who is involved?
Non-EU online sellers in general and Chinese traders in particular are accused of evading VAT obligations.
But Amazon and eBay also find themselves at the centre of the VAT furore as it is on these marketplaces that the fraud is occurring; and neither company is ensuring their sellers comply with VAT requirements.
Who is affected?
UK and other EU online traders are bearing the brunt of the VAT evasion by overseas sellers – to the point where an increasing number have had to scale back or even give up their own online businesses because they are being priced out of the market.
As part of their investigation, the Guardian placed a sample order on Amazon for 24 popular items, sold by 23 different sellers, at a total price of £1822.95.The items were held in stock at Amazon’s UK warehouses by Chinese, Hong Kong and US sellers. No VAT was shown as being charged on any of these.
And as long ago as November 2014, The Mirror ran an investigation into Chinese sellers on eBay. It found that of the top ten firms (by turnover) that were selling iPad cases, five were Chinese firms with their stock in Britain but a business address in China. And none listed a VAT number.
The Mirror quoted a UK trader in electronic goods as having seen his turnover reduce from around £90,000 in 2012, to £60,000 by the end of 2013 to around £20,000 in November 2014. From employing five people, the company had retrenched to himself and his wife.
Richard Allen of RAVAS (Retailers against VAT abuse schemes) gave the following quote to the Guardian: “The systematic abuse of the VAT system results in damaging price distortions that drive legitimate UK businesses to the wall, and workers out of their jobs.”
The ability to keep stock and dispatch locally (whether in warehouses they have secured themselves - or in Amazon’s warehouses) means overseas sellers can offer next day delivery. This is a real plus to attract buyers. But if they are benefitting from this local presence to gain a competitive edge – they should also be paying local taxes on any sales. If not, the playing field is certainly very uneven indeed for UK suppliers.
Plus, this is obviously a significant chunk of money being lost to HMRC; an estimated £2 bn. lost through unpaid VAT – without taking account of the additional losses to UK traders.
And of course the problem applies to other EU countries too.
Is anyone actually doing anything about it?
Examples of the impact that online ‘VAT-evaders’ are having on UK businesses have been raised in the Press over the last year or so – and increasingly with MPs, by the traders themselves and by RAVAS members who have catalogued evidence of suspected VAT abuses and have passed on their findings to UK and EU government offices.
HMRC has also been investigating online VAT evasion, working with the online marketplaces – and European counterparts – to try to quantify and address the problem.
But other than changing the VAT regulations – which is undoubtedly necessary but unlikely to happen in the near future - the feeling is that eBay and Amazon, while part of the problem, would be best-placed to help with a faster solution.
Implications for Amazon and eBay
All overseas sellers on eBay and Amazon are required to charge VAT on their UK sales.
Both companies, however, state that they have “no obligation to police VAT compliance by sellers using their sites, and no liability in cases in which sellers are found to have committed VAT fraud.” Their responsibility, they believe, is limited to ‘reminding’ users of the need to comply with tax obligations and the provision of ‘helpful guidance’.
Things get even more complicated in the case of Amazon, however, who are seen by some as being “morally complicit” in the VAT fraud, given that they benefit financially from each sale made – including those made because a VAT-free price was charged. Furthermore, their FBA programme enables overseas sellers to stock and ship from Amazon warehouses in the UK – enabling the one-day delivery so essential today.
As the headlines in the Press suggest, feelings against these two giants are running high and the feeling is they should definitely be doing more to help solve the problem.
According to RAVAS: “Amazon should not be able to abdicate responsibility for handling and profiting from fraudulent VAT transactions in the same way that members of the public cannot abdicate responsibility for handling stolen goods.”
Strong stuff indeed.
Watch this space – the debate continues.