VAT Evasion: Internet Retailers

Lord Herbert of South Downs Excerpts

Thursday 14th January 2016 Westminster Hall

[Nick Herbert (Arundel and South Downs) (Con)]

Thank you very much for calling me, Mr Hanson. It is a pleasure to follow my hon. Friend the Member for Daventry (Chris Heaton-Harris). I congratulate him on securing the debate and on the excellent way in which he explained the problem. He gave a thorough introduction, so there is little need for me to repeat his explanation of how this fraud is happening.

My interest in the topic dates from last year, when my constituent, Mr Neven Juretic, came to see me at one of my surgeries to explain what had happened to his business. I believe the Minister has met Mr Juretic—I am sure he will tell us more about that—who in 2010 set up an online retail business that grew very fast. He had a turnover of several hundred thousand pounds and employed quite a few people locally. It was all going well for the business, which was one of the top five sellers in its market on eBay, when suddenly, in 2014, it underwent a catastrophic loss of revenue, such that sales are now only about 5% of their previous level. That forced him to lay off a large number of his staff. He lost significant assets and now fears that his business faces bankruptcy.

Mr Juretic wondered what had suddenly caused the sharp loss of sales. He became aware that it was not because his competitors were selling better goods at better prices by running more efficiently and doing a better job than him, but because they were able to undercut his prices by about 20%. When he further researched the matter, he found that they were able to do that because, as my hon. Friend set out, they were evading VAT on their sales, which placed him at an immediate disadvantage. He teamed up with other retailers in the same position, and they have done an enormous amount of work. He set up vatfraud.org, to which my hon. Friend referred, which details the scale of the problem and sets out their concerns about the relative inaction in dealing with it.

There seem to be three sets of losers. First, there has been a change in retail practice as ordinary high streets have been affected by the growth of online marketing. The global trend is that people increasingly prefer to buy from online retailers. There is nothing wrong with that, but it has had an impact on our high streets. That is fine, provided that those online retailers sell fairly.

Secondly, there has been an impact on online retailers themselves, and small businesses are going under. Those small retail businesses were at least contributing to the economy and substituting for the high street businesses that were affected by the change in the way the market operates. The change is in consumers’ interest, no doubt, but those small businesses, such as the one in my constituency, were growing and employing local people, resulting in a change in employment patterns. They were successful UK businesses, and they are being clobbered.

Thirdly, there is a potentially significant loss of revenue to the Exchequer. I am sure the Minister will be the first to tell us that he wants to ensure that more revenue flows to the Exchequer, and that he wants to prevent a haemorrhaging of funds at a time when resources are in short supply. The fraud we are discussing has multiple effects, and it appears to be taking place on a substantial scale that justifies more effective action to tackle it.

Mr Juretic and his colleagues say that they have made some progress with trading standards, which is willing to investigate the issue, but they say that there has been inadequate co-operation between trading standards and Her Majesty’s Revenue and Customs. Their complaint is that they do not think HMRC is addressing the issue sufficiently seriously. As my hon. Friend said, it is possible to do research oneself and identify companies that are not properly VAT-registered, yet are selling stock that is clearly warehoused in the UK. That is the essence of the fraud. Mr Juretic and his colleagues identified 500 such companies—why is it not possible for agencies to go after those people? I ask the Minister in the spirit of openness, why has that not happened? It is clearly in the interest of the Exchequer and our national interest to ensure that businesses are not defrauded. Why is it not possible to go after those companies? After all, there is an audit trail, so it should be possible to identify companies that are not properly VAT-registered. They are meant to have a number, so they should be susceptible to that kind of compliance.

The situation is infuriating not only to the businesses that are affected but to the literally millions of law-abiding, tax-paying, VAT-paying small businesses that regularly find themselves at the sharp end of the tough VAT enforcement that we have in this country. HMRC never treats small businesses with kid gloves when it comes to paying their VAT. The hard workers, the strivers and those who employ a lot of people all pay their VAT and are absolutely slammed if they do not, so when they see that overseas companies are able to commit this kind of fraud, they get very angry about it. I feel angry on behalf of my constituent, given what happened to him.

Can there not be a more effective compliance mechanism? Is there a reason why it is so difficult? Perhaps there is, but it is important to communicate that to Mr Juretic and his colleagues, because at the moment they feel that there is just inertia. They have had a lot of meetings with HMRC and others, but they do not feel that they are getting anywhere. Their suggestion, which we should consider seriously, is that we should set up a special unit to focus on online retail businesses, given that that new sector is a huge growth area. It would be able to demand VAT numbers and pursue non-compliant companies.

What is the proper responsibility of the fulfilment houses? My hon. Friend the Member for Daventry was not willing to let them off the hook. At the moment, companies such as Amazon and eBay say, “We don’t have responsibility for this. If you bring us evidence that there are companies that have evaded VAT, of course we will take them off our websites and won’t allow them to advertise, but it’s not our job to police them.” I think that raises a big public policy question. Given that those businesses, which are often international businesses, make large sums of money that do not find their way to the Exchequer as tax revenue, what responsibility do they have to ensure that people who sell in their marketplaces are selling properly? At the very least they should comply with efforts to track down companies that appear to be defrauding the Exchequer and the taxpayer, but perhaps they have a bigger responsibility to undertake proper checks themselves.

How hard would it be to insist that those companies require businesses to have a verified VAT number before they are allowed to advertise? It should not be hard. Amazon, eBay or anyone else could make a simple request. If somebody who is clearly a business rather than an individual—in the case of eBay, they come through that side of the website—wants to advertise, they should have to provide a VAT number, which is checked, and they should be allowed to advertise only when it is found to be valid.

If HMRC were to make a concerted effort and the authorities were to go after those companies, it would be possible to tighten up compliance quickly. At the moment, my constituent and his colleagues feel that a concerted effort is not being made, that the authorities are not co-operating sufficiently with each other and that the fulfilment houses are passing the buck by saying, “We don’t have any responsibility for this.”

We need to take the issue seriously, for the reasons I have set out. If there are real obstacles, of course I will listen to the Minister and relay his comments to my constituents. They have asked perfectly fair questions, as I am sure they did when they met him. If we do not take tougher action on this issue, it will be a growing scandal and an embarrassment to HMRC and the Government. It is in the interests of all of us to clamp down on it, and I hope the Minister will tell us that he plans to do that.