UK consults on VAT rule changes for online marketplaces

The proposals were announced in a new consultation, which examines the current VAT liability rules applied to online sales by UK-based businesses, and asks whether they need to be extended.

The current rules, introduced in 2021 under the then Conservative government, broadly improved VAT compliance in the online marketplace sector by making marketplaces liable for VAT on certain sales by overseas sellers.

Those reforms helped clamp down on widespread avoidance of VAT by overseas sellers selling to consumers in the UK. However, the current government argues the legislation didn’t go far enough to keep pace with the proliferation of UK businesses selling domestic goods – particularly retail goods, restaurant and takeaway food – online in recent years, and amid growing concerns that sellers are finding “new and ingenious ways to avoid” their VAT obligations.

The government estimates that although online sales now represent 28% of all retail sales, sales made through online marketplaces are “only partially covered by the rules which ensure compliance”. HMRC estimates that as many as tens of thousands of businesses trading through online marketplaces in the UK are not currently fulfilling their VAT obligations and that this could be costing the public purse hundreds of millions of pounds each year.

The consultation, which runs until 18 August, seeks views on how the current rules can be more effectively enforced to address this problem, as well as putting forward proposals that online marketplaces should be responsible for collecting and remitting VAT for domestic sellers as well as overseas sellers.

The government says its proposals are designed to develop a compliance framework that tackles non-compliance and tax evasion across all sectors using online marketplaces to sell, and ultimately level the playing field for UK businesses who are compliant and between online and high street sales.

The paper highlights the particularly pernicious issue of VAT non-compliance in the delivered hot food sector from online takeaway food delivery platforms, restaurants, fast food kitchens and takeaway outlets that use those platforms. Many of these would have been exempt from the previous reforms because the businesses selling on their platform are situated entirely in the UK.

The potential implications for online marketplaces will depend on whether they already administer the existing VAT liability applied to overseas businesses selling goods online or whether their businesses will be affected by the updated rules because their platforms are located entirely in the UK. Marketplaces that facilitate non-business sales – such as individuals selling second hand clothes – will still be required to demonstrate to HMRC that their sales qualify as non-business sales under existing VAT law.

Bryn Reynolds, VAT expert at Pinsent Masons, said: “It is perhaps unsurprising that a number of overseas businesses which were evading UK VAT have continued to seek to do so by erroneously pretending to be established in the UK. These proposals would effectively close down another route of fraud. They will also mean that the platforms will no longer need to determine which sellers are established outside the UK, which will reduce their compliance burden significantly.”

Abigail McGregor, a tax specialist at Pinsent Masons, said: “This appears to be a rare example of a hypothecated VAT charge with the government committing that revenue raised from the measure will be ploughed into improvements for the business rates system for the UK high street.”

“The operational details of how HMRC would apply the minimum platform threshold, should it proceed, will be key. The target of carving out sales by small UK businesses who do not need to register for VAT is clear, but the implementation, particularly when it comes to disaggregated accounts and companies operating multiple online marketplaces, could be complex,” she said.