The U.K. tax office has almost doubled the number of sellers it red-flagged to global e-commerce giants Amazon Inc., Alibaba Inc. and EBay Inc. for tax evasion and non compliance in 2018.
The number of red flag notices—or joint and several liability (JSL) notices—that the U.K. tax office issued grew to 4,600 from 1,300 in Jan. 2018.
The notices are issued to alert online marketplaces of U.K. or overseas sellers that refuse to pay tax or don’t pay the correct value-added tax when goods are sold to U.K.-based customers. Her Majesty’s Revenue and Customs, the U.K. tax office, then pursues the online marketplace for the unpaid VAT, if the e-commerce company doesn’t remove the non-compliant vendor from its trading platform within 30 days of the notice being issued.
Bloomberg Tax reported earlier this week that Alibaba had expelled some 200,000 vendors from its online market platform AliExpress globally for failing to pay tax on goods sold.
“These figures show that HMRC, working closely with the major online marketplaces, is making real headway tackling this serious and damaging evasion,” said Financial Secretary to the Treasury Mel Stride in a Jan. 11 statement.
Online Marketplaces Respond
The marketplaces, in most cases, respond promptly and remove sellers after they receive a red flag notice, a spokesman for the tax authority added.
Online marketplaces have themselves made further efforts to clamp down on VAT tax evasion via their platforms in several different ways. Amazon and EBay, for example, sent letters to China-based traders urging them to register for VAT.
According to HMRC, VAT registrations have grown to 58,000 from 27,550 a year ago.
“We have no tolerance for vendors who fail to comply with their VAT obligations on our marketplace. We will continue to support HMRC in its efforts to ensure a fair and level playing field for businesses,” an EBay spokesperson told Bloomberg Tax.
But an uptick in VAT registrations doesn’t mean compliance. “It remains to be seen if HMRC can collect VAT from these overseas sellers if they wish to avoid paying the tax,” said Mustafa Sikandary, an associate director at accounting firm Moore Stephens.
JSLs were introduced in 2016 to help deal with the estimated 1.5 billion pounds of tax evasion that takes place on online marketplaces annually, according to HMRC.
The 1.5 billion pounds represents about 13 percent of the U.K.’s 11.7 billion-pound VAT tax gap identified by HMRC in 2018.
Since the new rules came into effect, HMRC estimates that it has collected an additional 200 million pounds in additional VAT declared by overseas sellers.
The step-up in the number of online sellers being referred to HMRC is evidence that the tax authority is beginning to flex its new powers, said Anne Holt, indirect tax partner at RSM UK.
“It’s a positive step for the protection of the revenue generally and provides a move to a fair and level playing field for U.K. based businesses competing in similar markets,” she said.
In the U.S., the Supreme Court in last year’s Wayfair ruling found that states can hold online vendors liable for sales tax if they rise above a specified sales threshold. So far, 30 states already have such laws in place.
Many states are also rushing to impose duties on marketplace facilitators such as Amazon, EBay, and Etsy Inc. that host sellers on their sales platforms. So far, 14 states have enacted such laws.
The Supreme Court’s June 21 Wayfair ruling tossed out its 1992 physical presence standard affirmed in Quill Corp. v. North Dakota, which limited the ability of states to tax remote sales. The majority in the 5-4 ruling suggested strongly that South Dakota’s law requiring remote sellers to collect sales tax if they had more than $100,000 in in-state sales or 200 transactions would pass constitutional muster.
VAT tax evasion levels in U.K. are comparable to European Union levels, which is 14 percent of the 147.1 billion euros ($168.7 billion) annually, according to separate reports in 2017 published by the U.K. Public Accounts Committee and the National Audit Office.
The global nature of VAT tax evasion has led to several jurisdictions, including Germany, India and Australia to launch their own joint liability notices.
The European Council adopted new rules for e-commerce marketplaces in December 2017 that make platforms like Amazon and eBay liable to directly collect their sellers’ VAT and pay it in the consumer’s member state. Member states should transpose the new directive in full by Jan. 1, 2021, according to European Council documents.
Marta Papis-Almansa, a senior lecturer on EU VAT law at Lund University in Sweden, told Bloomberg Tax that the EU is redefining marketplaces as deemed suppliers of goods for distance sales, as opposed to intermediaries outside the direct supply chain, said Papis-Almansa. While the platforms are liable for collecting VAT from their sellers and paying it directly to the responsible domestic authorities, they’re able to deduct it from their overall tax burden.
“With the German or U.K. solutions, we have a post-fraud punishment, or recovery for loss of VAT revenue,” she said. “The solution on the EU level is a mechanism that prevents fraud from happening, and makes the collection more efficient.”
Germany recently became the second state in the EU after the U.K. to jump the gun by passing new legislation that makes internet marketplaces like Amazon and eBay liable for VAT.
In this case, however, faster isn’t better, attorneys told Bloomberg Tax: New laws out of Germany and the United Kingdom envision a convoluted game of surveillance and bill collection bound to overwhelm both tax authorities and e-commerce platforms, as opposed to more streamlined European regulations that take effect in 2021.
As such, attorneys predict a bumpy implementation period in both countries underscored by bureaucratic backlogs, an exodus of electronic sellers to Chinese platforms, and possible legal challenges to authorities’ conscription of e-marketplaces to fight tax evasion.
“The main fear of the platforms is that maybe these traders which are not registered will now go to other platforms which are not available in Germany – Alibaba, for example – and then just continue not to be registered,” Matthias Luther, an attorney specializing in VAT with KMLZ law firm in Dusseldorf, told Bloomberg Tax. “The German tax office cannot go against them, so they’ll just ignore the rules or circumvent them.”
-- With assistance from Jabeen Bhatti, Ryan Prete.
(Updated with further reporting throughout)
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(Adds paragraphs 16, 17, and 18 on Wayfair and adds graphic.)