Online marketplaces

Finance (No. 2) Bill – in a Public Bill Committee am 11:00 am ar 16 Ionawr 2018.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury 11:00, 16 Ionawr 2018

I beg to move amendment 56, in clause 38, page 27, line 6, leave out “69” and insert “69(1)”.

This amendment specifies the subsection of section 69 of the Value Added Tax Act 1994 that is being amended by Clause 38(2).

With this it will be convenient to discuss the following:

Amendment 57, in clause 38, page 27, line 9, at end insert—

“(2A) In subsection (3) of section 69, for ‘subsection (4)’ substitute ‘subsections (3A) and (4)’.

(2B) After subsection (3) of section 69, insert—

‘(3A) In relation to a failure to comply with any regulatory requirement under section 77E (display of VAT registration numbers on online marketplaces), the prescribed rate shall be determined by reference to the number of occasions in the period of 2 years preceding the beginning of the failure in question on which the person concerned has previously failed to comply with that requirement and, subject to the following provisions of this section, the prescribed rate shall be—

(a) if there has been no such previous occasion in that period, £5,000;

(b) if there has been only one such occasion in that period, £10,000; and

(c) in any other case, £15,000.’”

This amendment increases the prescribed rate of a penalty for failure to comply with a regulatory requirement under section 77E of the Value Added Tax Act 1994 (as proposed to be inserted by Clause 38(8)).

Amendment 58, in clause 38, page 27, line 15, at end insert—

“(ba) after subsection (3), insert—

‘(3A) The period specified in a notice in accordance with subsection (3)(a) may not be longer than 10 days.

(3B) It shall be the duty of the Commissioners to give notice under subsection (2) in any case where they are satisfied that to do so would protect or enhance VAT revenue.’”

This amendment specifies the period for compliance with a notice under section 77B as no more than 10 days and requires HMRC to issue a notice in any case where VAT revenue would be protected or enhanced by doing so.

Amendment 59, in clause 38, page 27, line 32, leave out “60” and insert “10”.

This amendment reduces the period at the end of which a person must cease to offer goods in breach of the registration requirement from 60 days to 10 days.

Clause 38 stand part.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

It is a pleasure, as ever, to see you in the Chair, Sir Roger. My hon. Friend the Member for Oxford East reminded me of the Sherlock Holmes case, “The Adventure of the Solitary Cyclist”. I am not sure whether someone who has a dog with them still counts as a solitary cyclist, but given that there is one cyclist, I expect they do.

If hon. Members look at our explanatory note on amendment 57, they will see that our proposals and the penalties we believe should be enacted certainly do not go as far as the penalties that the hon. Member for Brentwood and Ongar will be aware of, since I understand he did his PhD on the Mercian polity. That is reminiscent of another document, “Theft, Homicide and Crime in Late Anglo-Saxon Law”, which stated:

“It is a startling but infrequently remarked upon fact that for five centuries English law, which prescribed the sternest penalties for theft, contained…a relatively minor royal fine for homicide.”

We are not going to the sternest of fines for what is perhaps de facto theft here, but we are sending a clear message in relation to online marketplace avoidance, or effectively evasion, of VAT: “You don’t try to rip off the Government.”

Our proposals seek to address the growing levels of online VAT fraud and the responsibility of online retailers to play a much-needed part in tackling it. We now all spend a large proportion of our lives online, so it is unsurprising that more UK consumers than ever are buying a larger proportion of their goods through online marketplaces such as Amazon, eBay and others. In 2016, 14.5% of all UK retail sales were online, up from 2% in 2006. Just over 50% of those sales were through online marketplaces rather than directly by the seller.

The VAT rules clearly require that

“all traders based outside the European Union (EU), selling goods online to customers in the UK, should charge VAT if their goods are already in the UK at the point of sale”,

but, as hon. Members will be aware, some are not doing so. According to the National Audit Office:

“HM Revenue & Customs (HMRC) estimates that online VAT fraud and error cost between £1 billion and £1.5 billion in lost tax revenue in 2015-16 but this estimate is subject to a high level of uncertainty… The estimate is calculated from an assessment of the extent of under-valuation in a sample of medium and high-risk imports from high-risk non-EU countries, underpinned by assumptions informed by operational data and intelligence. This method uses an estimate of import VAT fraud as a proxy for the scale of online VAT fraud and error, and HMRC considers it to be the best estimate from data available,” which is perfectly reasonable.

The Campaign Against VAT Fraud on eBay & Amazon in the UK estimates that online VAT fraud

“equates to £27 billion in lost sales revenue & additional taxes to UK businesses and the public purse in the last 3 years” alone. What is more, HMRC has stated that it does not have data on online fraud and other losses before 2015-16, and as far as I am aware it does not plan to repeat the review of lost tax for future years. Similarly,

“HMRC estimates do not account for the wider impacts of online VAT fraud and error such as distortion of the competitive market landscape.”

Photo of Ruth George Ruth George Llafur, High Peak

I have worked with major UK retailers for almost 20 years, and there has been growing distortion in the market, as between brick-and-mortar retailers and online retailers, on business rates in particular. Does my hon. Friend agree that if we do not tackle VAT fraud more proactively, it simply adds insult to injury for those honourable retailers that are investing in considerable job and employment opportunities in the UK?

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

My hon. Friend makes a valid point that goes to the heart of much of today’s discussion: those who seek to avoid should pay appropriate penalties.

The slowness of HMRC to respond to growing fraud online has been criticised by the Public Accounts Committee, which raised concerns first in April 2013 and more recently in October 2017. It is not alone; the National Audit Office reported in 2013 that

“HMRC had not…produced a comprehensive plan to react to the emerging threat to the VAT system posed by online trading.”

The report found that HMRC had developed tools to identify internet-based traders and launched campaigns to encourage compliance, but had shown less urgency in developing an operational response to it.

Trader groups, such as the Chartered Trading Standards Institute, have been raising concerns for many years, and claim that online VAT fraud has been a problem from as early as 2009, yet the Government did not recognise the problem until 2015. Nearly three years later, the Government are finally introducing measures that will force the Amazons and eBays of this world to be held jointly accountable for the VAT of online vendors that use their sites.

My understanding is that HMRC has instead pursued civil operations against suspected evaders, as HMRC claims that difficulties in prosecuting suspected online fraud make that route lengthy, costly and uncertain of outcome; I suppose that is justice. Barriers include sellers being based outside the EU, and the need to show intent to commit fraud. I would like to ask the Financial Secretary to the Treasury how many operations HMRC has pursued since 2015, and what their outcomes were.

The Public Accounts Committee report on online VAT fraud found that HMRC had only recently begun to take the problem seriously, despite the fact this fraud leads to significant loss of revenue to the Exchequer, in effect depriving our public services of the funds they so desperately need. The Committee found that HMRC, rather than trying to use its pre-existing powers, waited until the introduction of new measures under the Finance Act 2016 before it attempted to hold online marketplaces responsible for VAT that had been fraudulently evaded by traders. HMRC has been too cautious in using those powers, and the Government have refused to name and shame non-complaint traders; so far, to my knowledge, they have not prosecuted a single one for committing online VAT fraud.

Professor de la Feria, an expert in tax law at the University of Leeds, pointed out that HMRC has not been doing enough to tackle the problem, despite the required legislation being in place. She argued that laws existing before the introduction of the 2016 measures provided scope.

Photo of Luke Graham Luke Graham Ceidwadwyr, Ochil and South Perthshire

As a member of the Public Accounts Committee, I was at the hearing on VAT fraud. Does the hon. Gentleman not recognise that VAT is incredibly difficult to police, especially on e-commerce platforms, given the international nature of a lot of the trade, including by small traders in China? Does he not accept that changes put forward in the Budget address some of the concerns that the Public Accounts Committee raises, and mark a positive step on the Government’s part?

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Yes and yes, but that does not alter the fact that we need to push on as much as we can with tackling this issue. The amendments go some way towards helping and, importantly, towards sending a message to those who choose to evade VAT. In online marketplaces and fulfilment houses, fraudulent activity continues fairly unabated, and we must do something about it.

Professor de la Feria also believes that part of the reason that HMRC has been slow to tackle online fraud is that it is most likely considered not cost-effective to pursue it. Online marketplaces and HMRC are not doing enough together to tackle the problem, notwithstanding the action that has been taken. Online marketplaces continue to earn their commissions, and so their profit, from people who are defrauding the British taxpayer. Amazon, for example, organises regular presentations at Chinese fairs—a point referred to by the hon. Member for Ochil and South Perthshire—to recruit overseas sellers, I suspect; has plans to buy a shipping company; and fulfils orders and handles payments. That all suggests a very embedded relationship with the seller. Those connections and networks are there; people must know each other to set them up. HMRC should use those relationships and networks to do something about the problem.

Until we can incentivise online marketplaces to act, they will continue to offer a lacklustre approach to tackling online VAT fraud. In September 2016, HMRC introduced new legal powers to tackle online VAT fraud and error. They allow HMRC to issue a warning to online marketplaces about potential sellers who are not paying VAT. Since their introduction, how many times has HMRC used the new powers? How many sellers has HMRC issued a warning about, and what was the result of the use of the powers? Since they were introduced, HMRC has seen an increase in the number of new VAT registrations from non-EU sellers, but HMRC confirms that it is not aware of the proportion of those sellers that have in the past been trading and not charging VAT, or whether those sellers will be compliant in future. Last year, HMRC told the Public Accounts Committee that it expected to collect £50 million more VAT in 2017 from the traders that had recently registered for VAT, so can the Minister confirm that HMRC has collected that money, or is on course to do so?

According to HMRC, some online VAT fraud is due to a lack of awareness, some overseas sellers being unaware that they need to pay VAT. Both Amazon and eBay, when testifying to the Public Accounts Committee, agreed with that view and described the lack of awareness of VAT rules as a major element of the problem. What efforts has HMRC made to educate sellers in the UK about potential VAT fraud? More importantly, what efforts have been made to ensure that overseas sellers are aware of the need to pay VAT?

The other part of the problem stems not from error, but from clear criminality. HMRC’s strategic threat assessment, carried out in 2014, concluded that it was highly likely that organised criminal groups based in the UK and overseas sellers in China were using fulfilment houses to facilitate the transit of undervalued or misclassified goods, or both, from China to the UK for sale online. It is particularly concerning that HMRC is uncertain of the exact number of fulfilment houses in the UK. Surely one of the first parts of cracking down on this criminality is establishing the exact number of fulfilment houses in operation. That goes some way to dealing with the point made by the hon. Member for Ochil and South Perthshire. Perhaps the Minister can take a minute to explain what steps HMRC is taking to address the issue and crack down on organised criminal groups in the UK and other countries, and what efforts Border Force is making to tackle online VAT fraud by targeting fulfilment houses, where the goods are stored.

Once again, it seems that HMRC is hampered by the Government’s cuts to staffing and resources, and that this is having an impact on the Government’s ability to crack down on online VAT fraud. According to the Public and Commercial Services Union—HMRC’s trade union—in real terms, after the cost of inflation is taken into account, the resources available to HMRC are about 40% less today than they were in 2000. Since 2010, under this Government, HMRC’s staffing has fallen by 17%, and it is set to fall further under the “Building our Future” programme. These are important factors in relation to tackling evasion. That programme will close practically the entire departmental estate of 170 offices. How will that help with tackling the mass of VAT crime?

The elephant in the room is the added uncertainty about Brexit and its impact on the effectiveness of the measures. There is considerable uncertainty about the exact terms on which the UK will leave the EU, so it is vital to get to grips with this. Sellers based in the EU may end up operating under the same VAT terms as apply to non-EU sellers and therefore may also be tempted not to charge VAT. Perhaps the Minister can offer insight into what steps HMRC is taking to ensure that these measures will be robust, irrespective of the outcome of the Brexit negotiations.

There are already considerable control weaknesses at the border. The most recent European Anti-Fraud Office report on customs duties was scathing about the state of UK customs, arguing that “continuous negligence” has deprived the EU of almost £2 billion in revenues on lost Chinese merchandise. According to the report, British customs played a central role by repeatedly ignoring warnings to take action over Chinese textiles and footwear pouring into the EU. Since then, HMRC has failed to open any criminal investigations into specific fraud schemes. The European Anti-Fraud Office is so aggrieved with the UK Government that it has recommended to the European Commission’s directorate-general for budget that the UK should be forced to pay £2 billion directly into the EU budget.

A number of UK trader groups believe that HMRC could do more, particularly when it comes to seller data that would identify potentially non-compliant sellers. HMRC has begun to collaborate with the online marketplace to gather this data, but the data exchange is in its early stages.

Amazon and eBay have both made huge assertions about the level of action they have taken to deal with sellers on their websites not paying VAT, and about the efforts they have made to collaborate with HMRC. However, Amazon started collecting VAT numbers from non-EU sellers only six months ago and, perhaps most worrying of all, told the Public Accounts Committee last year that knowing whether a non-EU seller has a valid VAT number is not a crucial data point. HMRC has reported resistance from online marketplaces when it comes to sharing data that is not held in the UK’s jurisdiction, so it is clear that there is a lot more work to do.

We welcome moves to make online marketplaces jointly liable for the VAT of the sellers on their websites. However, we have concerns, which are laid out in our amendments. The first concern is about the wording of the measures, which seems to imply that joint liability will not be presumed in law; instead, it will happen after HMRC has undertaken an investigation. This creates the opportunity for online marketplaces to continue tacitly to allow their sellers a level of freedom unless HMRC specifically catches them out.

Secondly, the Government have not stated the value of the penalty that an online marketplace would incur if it refused to co-operate with HMRC. Amendment 57 would set the penalty at £5,000 for the first offence, £10,000 for the second, and £15,000 for every offence thereafter.

Thirdly, the Government have failed to specify a time framework for an online marketplace to comply with HMRC and remove a seller’s goods if it fails to pay VAT. Amendments 58 and 59 would give the online marketplace 10 days to comply, and would reduce the time after which it must cease to offer goods that are in breach of the registration requirement from 60 days to 10 days. This would ensure that an online market that failed to comply would automatically cease offering goods in breach of the law.

The measures are a step in the right direction, but as I have shown, there is an array of outstanding questions that the Financial Secretary to the Treasury and HMRC have failed to answer. They may well be able to answer them, but until they do, we will continue to think that the Government are not as serious as they should be about tackling the growing industry of online VAT fraud, and about the billions potentially being lost to the UK taxpayer.

Ordered, That the debate be now adjourned.—(David Rutley.)

Adjourned till this day at Two o’clock.