VAT Evasion: Internet Retailers

David Gauke Excerpts

Thursday 14th January 2016 Westminster Hall

[The Financial Secretary to the Treasury (Mr David Gauke)]

It is a great pleasure to serve under your chairmanship for the first time, Mr Hanson. It was not that long ago that you and I were debating tax matters in your long and distinguished period on the Labour Front Bench, as my shadow. I note that four of the five shadows I had in the previous Parliament are no longer serving on the Labour Front Bench. I hope the hon. Member for Wolverhampton South West (Rob Marris) will not see that as in any way ominous.

[Rob Marris]

I see Mr Hanson has had a promotion, so he should be congratulated.

[Mr David Hanson (in the Chair)]

With due respect, I have had a release after 17 and a half years.

[Mr Gauke]

Yes, that is a very long sentence. I hope you are enjoying your new role, Mr Hanson.

I congratulate my hon. Friend the Member for Daventry (Chris Heaton-Harris) on securing this debate and setting out the case so well. I also congratulate my right hon. Friend the Member for Arundel and South Downs (Nick Herbert) on his passionate speech. He is correct to say that I have met Mr Juretic and listened carefully to the points he raised.

I will turn to specific points, but first I want to acknowledge the important work that Her Majesty’s Revenue and Customs is doing in collaboration with other agencies, both in the UK and internationally, to tackle tax evasion, which, as the hon. Member for Wolverhampton South West pointed out, is what we are talking about today. Tackling tax evasion in all its forms is a priority for HMRC. Last year, HMRC collected and protected a record £26 billion in revenues from compliance activities and secured more than 1,200 prosecutions using intelligence, sophisticated risking systems and smart data.

The phenomenal growth in online sales in recent years, which we have heard about this afternoon, has made many people’s day-to-day lives much easier but presents significant challenges for HMRC. That is because the supply chains are often very complex and involve a number of different entities. Suppliers can be located overseas and their records are not always available alongside the goods. All those factors combined make it much more difficult to spot where tax and duty have been paid.

To make things more complicated, HMRC is looking for frauds taking place in the midst of large volumes of legitimate trade. It is far from our, or HMRC’s, intentions to get in the way of legitimate trade, so HMRC is mindful of the need to target its activities proportionately. Nevertheless, this is a significant issue that we are determined to tackle. Building on its expertise in tackling evasion, HMRC has brought together specialists from across the Department and established in spring last year a taskforce to tackle the specific customs and VAT frauds that we have been talking about. That taskforce currently has more than 75 live investigations open into businesses or entities suspected of flouting the rules, and that figure is expected to grow to 150 before the end of the 2015-16 financial year.

Retailers Against VAT Abuse Schemes has highlighted about 500 businesses that it alleges are complicit in these frauds in some way. My hon. Friend the Member for Daventry drew attention to that list, and other hon. Members have referred to it. I assure the House that HMRC has examined the RAVAS list closely. For reasons of taxpayer confidentiality, I am not in a position to know, let alone say, what conclusions HMRC has reached in respect of each of the companies listed by RAVAS. However, it would only be fair for me to say that one cannot assume every company on the list is non-compliant.

At this point, I should touch on VAT registration numbers, which a number of hon. Members raised, including the hon. Member for Ross, Skye and Lochaber (Ian Blackford). Not all sellers are required to be VAT-registered. Overseas sellers that supply goods, located outside the UK, have no requirement to be registered for UK VAT. If they are compliant, in those circumstances, they would pay import VAT at the border. Of course, that would be a sticking tax, as they would not be entitled to reclaim that VAT. There are complications in this area, and the absence of a VAT number does not, in itself, suggest that a seller is breaking VAT law.

[Philip Davies in the Chair]

The issue is if sellers are claiming to be outside the UK and selling from outside it, but are in fact storing goods in a warehouse in the UK and dispatching them from the UK to a customer here. That changes the circumstances, but I want to be clear that the absence of a VAT number does not necessarily mean that fraudulent activity is occurring.

HMRC is working jointly with other Government agencies, including carrying out joint visits with trading standards and sharing intelligence with UK Border Force, to address risks across the entire supply chain to ensure that all sellers who sell online pay all the taxes that are due. To give hon. Members a flavour of that work, in an operation just before Christmas, HMRC and trading standards seized goods worth half a million pounds. As HMRC’s programme of activity continues, and both its operational intelligence and understanding of fraud improve, it expects to make more interceptions and seizures of illicit goods.

I should stress the point about illegitimate and legitimate trade. HMRC has the powers to seize or detain all goods in a warehouse, for example, but it also has to think about the potential impact of its actions, for instance, on the end consumer. If HMRC were seizing goods that subsequently turned out to be there legitimately, I suspect many of our constituents would want to raise concerns.

We recognise the concerns that have been raised by compliant businesses. Clearly, it is very important that non-compliant businesses should not be allowed to establish any unfair advantage over compliant businesses, as that would distort competitiveness. Again, that point was rightly made by a number of hon. Members. Tackling these frauds is just as much about maintaining a level playing field for business as it is about collecting the tax and duty that should be paid.

That operational work is the first strand of HMRC’s work to tackle these frauds. The second strand is engagement with the online platforms on which goods are sold.

[Rob Marris]

Before the Minister moves off the first strand—perhaps he is planning to address this point later—23 months ago he talked about the investigations that were going on. He tells us today that there are 75 live investigations. What he could tell us, which would not breach taxpayer confidentiality, is whether there have been any prosecutions—which would be in the public domain—in the last five years for this sort of fraud.

[Mr Gauke]

I will have to write to the hon. Gentleman with details on that. I am not in a position to give any numbers this afternoon, but I understand his point.

Turning to online platforms, I can tell hon. Members that a meeting with the top online platforms took place recently, at a very senior level, to explore the role that they can play in preventing such frauds. HMRC is proactively following that up to see how it can work with the platforms to tackle the fraud and better quantify the scale of that. However, having looked at the matter, HMRC’s view is that online platforms have no liability for unpaid VAT where the operator merely provides a marketplace for businesses to sell goods.

I know that this point was raised by my hon. Friend the Member for Daventry, and although I am loth to get too much into a legal argument, he mentioned the Kittel case. It is worth bearing in mind that the Kittel case applied in the context of MTIC—missing trader intra-Community—fraud, or carousel fraud, which the hon. Member for Wolverhampton South West and I debated some years ago. Irrespective of that issue, it is worth pointing out that the Kittel case has been used by HMRC in the context of withholding repayments of input tax to members of a supply chain. It is a civil case, not a criminal case, and in HMRC’s view, the important difference here is that all members of a supply chain in MTIC fraud have, at some point or other, title of the goods, enabling them to reclaim input tax. That is not the case when an online platform is involved in providing services relating to the sale. Therefore, HMRC does not believe that Kittel applies in these circumstances in the way that my hon. Friend suggests.

It is also worth pointing out that there are many parties involved in a transaction where this type of fraud may occur—for example, fulfilment houses, payment providers, freight forwarders and agents, and online marketplaces as well as online sellers. HMRC is not limiting anti-fraud work to marketplaces only, although it recognises that they play an important role and is prioritising its engagement with them in the coming weeks.

The third and final strand to tackling this issue is putting together an effective set of policies that can make this sort of fraud harder to perpetuate in the first place. As hon. Members will recognise, unilateral action is not going to solve the problem by itself, as there is an important international dimension to these frauds. They affect the revenues of other EU member states as well as the United Kingdom, and we are in close dialogue with them about how best to combine our efforts to tackle such frauds.

[Rob Marris]

Welcome to the Chair, Mr Davies. Would the Minister therefore say that in this respect, it would be advantageous to the United Kingdom to remain a member state of the European Union, because of that international dimension and the international action to which he referred?

[Mr Gauke]

I do not know whether that intervention was for my benefit or for the arrival of our new Chairman —Mr Davies, it is a great pleasure to see you in the Chair this afternoon.

The point I would make is that whether we are inside or outside the European Union, international co-operation is very much necessary in such cases. As an example of that, the customs aspects of these frauds—it needs to be emphasised that this is a customs as well as a VAT issue—are on the agenda for the meeting of the directors general of all EU customs services on 26 March. There is some evidence that the UK has been particularly targeted for these frauds because of our much greater take-up of online shopping. That will make it all the more important that we work closely with our international counterparts, for the benefit of the UK and more widely. HMRC already works closely with the European Commission and OLAF, the EU’s anti-fraud unit.

Of course, there is a lot more to be done, not least as online retailing gets ever more popular worldwide. All taxes are kept under review, and HMRC is considering whether there need to be policy changes or other changes to the rules that apply to online sales. However, for effective longer term solutions, we will need to continue our engagement with other EU member states, the Commission and the OECD, and I would like to assure hon. Members that that dialogue is already under way.

Our goal is simple: one where the customer continues to enjoy the benefits of being able to buy goods conveniently through an online platform, but where unscrupulous businesses cannot undermine, through fraudulent activity, businesses that do the right thing. Although there is still much work to be done, I hope that hon. Members will appreciate the strong and collaborative efforts that HMRC is making to tackle this issue.