The government has agreed to publish an updated estimate of the VAT tax gap by March but has denied that HMRC’s current estimate of the revenue lost to the Treasury is flawed.
Responding to a Public Accounts Committee report that concluded government needed to take more action after it was estimated that £1bn-£1.5bn in tax revenue was lost to online VAT fraud and error in 2015-16, the government said HM Revenue & Customs will update its estimate of VAT lost to the Exchequer from businesses selling goods online and not complying with UK VAT rules, incorporating any new evidence that is available.
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The committee report, which was published in October, highlighted that losses occurred when sellers based outside the European Union import goods into the UK for sale to UK customers. Their products are stored in the UK and then dispatched to buyers, but VAT can go unpaid when sellers do not declare the correct value of their imported goods or even avoid registering for a VAT number altogether.
Committee chair Meg Hillier said that HMRC needed to be “far tougher in protecting the interests of British businesses and taxpayers” and as a priority must inject more urgency into enforcement action.
The formal government response to the report, published yesterday, accepted the call for an updated analysis of the tax gap, including new evidence and assessments of risks from online transactions.
“Although the department [HMRC] does not agree that its estimate of the impact of online VAT fraud is out of date and flawed, it will update its estimate of the VAT lost to the Exchequer from businesses selling goods online and not complying with UK VAT rules,” the response read. “Separately, the department will produce an analysis of the potential wider impacts drawing on economic data and theory."
The response also accepted the call by MPs for HMRC to inject “much more urgency to tackling the problem of online VAT fraud by making much stronger and more extensive use of its existing powers”, including setting long- and short-term targets to close the gap.
The government highlighted that chancellor Philip Hammond announced in last month’s Budget that a call for evidence would be issued next spring on how to ensure digital platforms are compliant with the tax rules.
“The department [HMRC] will develop a document that sets out its expectations of online marketplaces in this area, including collaborative working arrangements, exchanges of data and timeliness of responses to evidence of non-compliance. The department will discuss this with, and make it available to, all online marketplaces used by UK consumers, with the expectation that the marketplaces will agree to its contents.”