VAT Evasion: Internet Retailers

Debate between Chris Heaton-Harris and Rob Marris

Thursday 14th January 2016 Westminster Hall

[Rob Marris (Wolverhampton South West) (Lab)]

It is a pleasure to appear before you for the first time, Mr Hanson. This has been an important and fairly short debate. The hon. Member for Daventry (Chris Heaton-Harris), whom I praise for securing the debate, indicated when seeking it that he thought an hour and a half would be enough because the issues are quite simple. The solutions are quite complex, but the issue we are ventilating today is clear. It is about fraud. It is not tax avoidance, it is tax evasion.

I thank the House of Commons Library and Retailers Against VAT Avoidance Schemes or RAVAS, which I met on 17 November last year. At the same time, I also met Neven Juretic, who is the director of Maikai Ltd and a constituent of the right hon. Member for Arundel and South Downs (Nick Herbert). Mr Juretic suffered considerable losses, as the right hon. Gentleman outlined today. I also met Paul Miloseski-Reid, the UK lead trading standards officer. I have to salute Mr Juretic for the immense amount of work he has done not only in successfully lobbying his excellent local MP, but in producing an excellent document that proposes a number of solutions, as well as outlining the scope of the problem that our country faces.

The sector is huge and growing. The House of Commons Library tells me that UK average weekly internet retail sales are £1.1 billion, or about £57 billion a year, and growing. That is more than 15% of all UK retail sales, and the figure has gone up by two thirds since 2010—it is growing massively. Many of the frauds involve small consignments, such as tablet computers or iPhones, and the number of small consignments arriving in the European Union from outside the EU has gone up from 30 million in 1999 to 115 million in 2013, the latest year for which I could get figures. No doubt the number will have gone up considerably since then.

According to HMRC’s preliminary estimate of the tax gap for 2014-15, 10.4% of it, or £13 billion, is VAT. No hon. Member is suggesting that a crackdown on internet retail sales fraud would recoup all of that amount, and not all VAT fraud in the United Kingdom is to do with internet retail sales, but it is a big and growing problem.

The European Union requirement on companies—and individuals, I think—to register is covered by the EU electronic commerce directive, which we adopted in 2002. That is going back 13 or 14 years, and given the pace of change it is likely to need revisiting. It certainly needs to be enforced. I am unclear about whether the provisions of the directive are being enforced in the United Kingdom, but that might be because of my misunderstanding of what it entails.

My understanding is that a non-EU person trading in the EU—the wording in legislation is a “non-established taxable person”—is required to register for VAT if making “taxable supplies” under the meaning of the principal VAT directive, regardless of whether trading is above the £82,000 threshold for registration required of a UK or EU company. Apparently, therefore—the Minister will correct me if I am wrong—legal persons from outside the EU are breaking that directive when goods are sold over the internet into the United Kingdom, yet there appears to be insufficient, if any, enforcement.

Mr Juretic proposed various solutions in his excellent report on billion-pound frauds. I am sure that the right hon. Member for Arundel and South Downs looked at those, and he has mentioned some of them. I am not sure that we need a specialist unit, but many of the solutions that Mr Juretic floated are worthy of discussion in some detail. I will not discuss them all today, but HMRC ought to be looking at them and at similar things. That gentleman has considerable experience, has the bit between his teeth and has done a huge amount of work.

The National Audit Office, too, has looked at the issue in some depth—in about 2014, because it was covered in a report on HMRC’s 2012-13 accounts. I might be putting a gloss on what was said by the NAO, which can speak for itself, but my understanding of the report is that the NAO was not convinced that the steps taken by HMRC on online VAT retail fraud were sufficient. The report made some suggestions.

We need action from the Government. I have a considerable amount of time for the Minister: he is mild-mannered, clever and dogged, and he has had his brief for a long time. He can probably remember, as I do, discussing VAT carousel fraud in Finance Bill Committees about eight years ago, which was the fraud du jour. There was a huge amount of fraud, and Labour, in government, put through measures that were largely supported by the then Opposition party, which now forms the Government. The then Opposition certainly entirely supported the principle of cracking down on VAT fraud, because not only is it an attack on much-needed Government revenue, but it means that there is not a level playing field for businesses such as that of Mr Juretic.

VAT fraud puts people in the UK out of work. It is not a victimless crime that is only about money. It is about jobs, people’s lives and how we as a society trade. That is changing, so we need to make changes to trade honestly. Consumers in this country are not getting a fair deal in knowing what they are buying and from whom.

I have personal experience of the situation, with a company called LightInTheBox—not that it was fraudulent. I tried to buy a tablet computer from it. I understand that sometimes such goods come from overseas, even from outside the European Union, so I looked carefully during the transaction, but I was never told that the computer was coming from outside the European Union. I thought, “Great, a standard tablet computer,” but it took six weeks to arrive and had come from China. I also had a demand from the Post Office to pay approximately £50 in import duties—understandably, because the goods had come from outside the European Union, addressed to me. I got the money back from LightInTheBox, incidentally—an honourable company, which paid my money back and accepted the computer back.

Though I say it myself, I am an educated person and I am of average skill at using the computer, but I do not believe that I was told, when I made that purchase, that the tablet computer was coming from outside the European Union. That might have affected my purchase, because things take longer to arrive from outside the EU and there is the possibility of customs duties, which are quite properly payable on something imported into the EU. It is easy to get caught out. People who want to act honestly as consumers might quite unwittingly be aiding and abetting fraud. It is not about consumers saying, “Oh, I’ll have a bargain. I don’t care about VAT”, although I accept that some might be like that. Other consumers want to play it straight but are misled by websites.

The Government must take some responsibility, because they have been in office for nearly six years. This fraud undoubtedly existed before, so when my party was in government we could have done something about it, but it has gone up massively since then, commensurate with the increased number of online retail sales. None of us knows for sure how much fraud there is, but we know that it is going on. Its extent is a bit unclear, which is one reason why HMRC seems not to have taken the issue as seriously as it should. Had it done so, we would know a bit more.

There has been a series of parliamentary questions, written and during debates, going back almost two years to February 2014. In what I think was a debate in Westminster Hall—the Minister will know—judging from Hansard, my hon. Friend the Member for Cardiff West (Kevin Brennan) asked questions. Subsequently, my hon. Friend the Member for Chesterfield (Toby Perkins) and my hon. Friend the Member for Salford and Eccles (Rebecca Long Bailey), now a shadow Treasury Minister, asked written questions. In the Lords, Lord Lucas has asked questions. This is an ongoing concern of Members of both Houses, and the Government should move a little more quickly on it.

When I read, as the hon. Member for Daventry did, remarks that the newspapers attributed to Dame Lin Homer in the Public Accounts Committee yesterday that the Revenue had been investigating online trading VAT evasion since the spring of 2015, my heart was not filled with joy. Dame Lin has, to say the least, a mixed track record of success in public service. To be fair to her, other people had indicated that the Government were looking at the matter, including the Minister in the debate here almost two years ago. He said:

“HMRC is working to identify and address the main risks posed by commercial online operating models for routing goods into the UK.”—[Official Report, 26 February 2014; Vol. 576, c. 409W.]

It was good that HMRC was looking at it two years ago, but what has happened in the intervening period? The Minister will no doubt tell us, but for those of us not in HMRC—I suspect this is the case for the hon. Member for Daventry, though he can speak for himself—it is not entirely clear what has happened since the Minister said the risks were being investigated. That is troubling.

Lord Ashton said, I think last autumn, that this was being considered at a senior level, so the Government are aware of it and Members in both Houses have been pushing the Government, but we hear reports from Mr Juretic—Mr Miloseski-Reid also referred to this—about insufficient co-operation between HMRC and trading standards. That is taking place against a backdrop where in many parts of England, and I suspect Scotland as well, local authority income is dropping, yet trading standards comes under local authorities and for some of those authorities a strong trading standards department may appear to be a lower priority than, for example—and understandably—social care for the elderly. In that case, what gets the chop? Unless HMRC really seizes this problem, it is likely to get worse.

The Government have made a bit of movement in the draft Finance Bill 2016, which laudably has been published. I laud the Government for the number of consultations they carry out on possible changes to tax-related matters—there are probably dozens outstanding at the moment. The draft Bill has 88 clauses and clause 79 touches on this matter, though, as I understand it, it does only touch on it, because it deals only with data gathering. It is important to gather data to know who is selling what to whom and who is registered and so on, but while the Government, with all their resources, are probably more correct in their assessment of law than I am, I am not sure whether they have got it right on the law in relation to retailers such as Amazon.

It is easy to focus on Amazon. I am sure that it is not only Amazon that has questions to answer in this regard, but it is an enormous company with enormous sales in the United Kingdom, so some of us—I think the hon. Member for Daventry did to some extent—use it as a bit of shorthand for mass online retailers. That is fair enough, and he may well be right that they are watching us. Despite my reservations about reports of working conditions at Amazon, I do use it for internet purchases. I did not buy the said LightintheBox tablet through Amazon.

I, like I suspect many people, have registered my credit card details with Amazon. I have a username, password and so on with it—in fact, it is the only organisation with which I deal that I ask to remember my credit card details. When my credit card statements come, charges for purchases I have made are taken from my credit card account in the name of Amazon, through its different permutations, because Amazon has different legal entities in the European Union. It does not just say Amazon; it will also have some initials or a qualifier that shows which part of the Amazon empire it came from.

I am not a contract lawyer, but as a lawyer who knows a bit about contract law—I knock about on it—that says to me, as a consumer, that I am buying from Amazon. When I make a purchase, I do not give my credit card details to another company; I give them to Amazon. On the face of it, when I look at my credit card statement, I see the money is going to Amazon. Therefore, I have a contract with Amazon.

It is often but not always the case—Amazon also sells direct—that transparently, as part of the purchase process, that order is fulfilled by another company. I do not have a contract with that other company; I have a contract with Amazon. Amazon presumably has a contract—it certainly has an agreement—with that fulfilling company, which might be Bloggs Lighting Ltd or whatever, but my contract is with Amazon. If Amazon has a contract with me and, one surmises, with Bloggs Lighting, Her Majesty’s Government have, on VAT fraud and evasion, considerable leverage with Amazon to say, “You, as a legal entity”—or several legal entities as in Amazon’s case—“trading in the European Union are selling to UK consumers and the goods are delivered in the UK.” That is because I am buying from Amazon.

That is my understanding of contract law. The Minister may be able to dissuade me and tell me that I have misinterpreted it, but, if that is the case, we should take another look at the law. As I, as a consumer, am buying from Amazon, it should be dealing honestly with me and dealing legally with those companies from which it buys the goods that it sells on to me.

Amazon should therefore be susceptible to legislation in the United Kingdom as to how it conducts its business. That legislation should not simply be the data gathering in clause 79 of the draft Bill, although that would be helpful. The legislation should also be that Amazon must ensure that those companies from which it buys goods that it then sells on to UK consumers online are VAT registered if their turnover is above the UK threshold or if they fall under the other legal architecture for VAT registration. That is because one imagines that, often, those companies are doing quite a bit of business with Amazon—Bloggs Lighting may sell a lot of lighting stuff to consumers who go on to Amazon.co.uk. Therefore, morally or legally, I do not think Amazon can step back and say, “We are an intermediary.” The hon. Member for Daventry may know that, in the school playground in the west midlands, when the teacher says, “You did something,” they say, “It wor’ me, Miss,” which means, “I am not guilty; I did not do it.”

[Chris Heaton-Harris]

Is there not an incentive for Amazon and other e-retail marketplaces to sort this problem out? They earn their money from commission on the total price charged. While the market might have grown a bit, the cut that Amazon would receive from a £10 item would be better than the cut from £8 it might receive for a similar good that might have been sold in the way that I detailed in my speech.

[Rob Marris]

I certainly agree with the hon. Gentleman. To take that on one step, if someone were to buy an Apple iPhone through Amazon for, say, £500, which retails from Apple online at £600, and if the reason for the price difference is not a more efficient business model but VAT evasion, Amazon is at least morally complicit in that, because it gets a cut of a £500 sale that it would not have had if the consumer had gone direct to Apple. Therefore, in that example there is a moral risk to Amazon, and, I think, a legal risk, that it is benefiting financially from fraud, because it gets a cut of a sale that would not have been made had the fraud not existed. It needs to look closely at what it is doing.

The Minister said in a written answer on 26 February 2014:

“HMRC (in liaison with Trading Standards and other agencies) is undertaking intelligence driven investigations and projects to address concerns relating to the activities of online companies, including undervaluation of goods at import.”

That is very welcome, but it was two years ago that HMRC was undertaking those investigations and projects. I hope the Minister can tell us today that some of those investigations have at least made progress in the past two years. I realise that some of those investigations may have taken place and, in legal or criminal terms, led nowhere—that is the nature of investigations. We might find that there is smoke but no fire, as it were. In other cases, we might see smoke, investigate and find fire. Either way, I regard that as progress. If something looks a bit odd and we investigate it, we will sometimes find there is nothing illegal going on, and we will sometimes find there is something illegal going on. Will the Minister tell us how those investigations have proceeded and how many there have been?

The Minister also said in that written answer:

“Where the online trader is a non-EU company, HMRC has no jurisdiction.”—[Official Report, 26 February 2014; Vol. 576, c. 409W.]

I understand that, but two things occur to me. First, the 2002 EU electronic commerce directive should be enforced in the United Kingdom. Secondly, if HMRC has no jurisdiction over those non-EU companies, some but not all of which will be Chinese, HMRC should, as I have stressed, look at the companies over which it does have jurisdiction—for example, Amazon or eBay. Those are two of the major companies engaged in online retail sales in the United Kingdom, and those sales should be subject to UK jurisdiction. I understand all the difficulties of different legal jurisdictions, both within and without the European Union, but we need to get a grasp on this.

Simple data collection, as provided for in clause 79 of the draft Finance Bill 2016, is a step forward but is not sufficient. I hope the Minister will reassure us today that some of the investigations to which he referred two years ago have led somewhere and borne some fruit, and that HMRC will look seriously at the suggestions put forward by Mr Juretic in his report. If the Minister cannot enlighten us today as to which of those he thinks are worthy of a closer look, perhaps he could write to Members. I hope the Government will look closely at what legal powers it could take to address the Amazons of this world and of this jurisdiction.

--- Later in debate ---

[Chris Heaton-Harris]

It is a pleasure to serve under your chairmanship, Mr Davies, and I welcome you to the debate.

When I bid for time for this debate at the Backbench Business Committee, I was hoping to get 90 minutes sometime at the end of January so that I could secure the support of the former Chairman of the Public Accounts Committee, the right hon. Member for Barking (Dame Margaret Hodge). I served on that Committee with her for five years, and we had plenty of conversations about online marketplaces, how much tax they pay and how much tax they should pay—she was very interested in the issue.

Given that we had just 24 hours’ notice of the debate, I am pleased that we have the Minister, the shadow Minister and the SNP spokesman here. I am also pleased that my right hon. Friend the Member for Arundel and South Downs (Nick Herbert) was able to attend and talk about his constituent’s experiences.

Obviously, I was pleased to hear about the investigations and goods seizures that are going on, because my constituent would like to be assured that HMRC is not reacting slowly to a situation that is developing extremely quickly. More and more of these companies are being formed, and dormant companies that have already been registered are being activated and used in the way I described.

I am pleased that there have been high-level meetings with the top online marketplaces, and I would be fascinated to find out their reaction to the inquiries that are taking place.

[Rob Marris]

I do not seek to draw the hon. Gentleman on the timing, but perhaps he could say whether he understands why some Members, certainly on the Opposition Benches, feel a little frustrated—he may or may not express a similar view—about the apparent lack of urgency with which HMRC is dealing with this growing problem.