VAT Evasion: Internet Retailers

Ian Blackford Excerpts

Thursday 14th January 2016 Westminster Hall

[Ian Blackford (Ross, Skye and Lochaber) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Hanson. I thank the hon. Member for Daventry (Chris Heaton-Harris) for securing this important debate. We have heard two wonderful, passionate speeches, which conveyed the anger that many people feel towards the devastation that can be caused in our constituencies as a consequence of VAT evasion. As well as anger we have had humour, wit and wisdom, for which I thank the hon. Member for Daventry and the right hon. Member for Arundel and South Downs (Nick Herbert).

Online retailers evading VAT clearly has an impact on the legitimate economy in this country. There has also been a clear impact on jobs and on individuals in both the constituencies already mentioned, where businesses have been put at risk of going under. HMRC has a responsibility to take the matter seriously given the loss to the Exchequer and the impact on the economy, and I hope that the Minister will address that in his response. Given the growth of the industry and its importance, it was a worthwhile suggestion that consideration should be given to the establishment of a special unit at HMRC. Those who operate marketplaces, the likes of Amazon and eBay, also have a responsibility. For the life of me, I cannot quite understand why they would want to walk away from the issue. They have to consider the reputational damage to their businesses. If awareness of the problem grows, UK consumers would unquestionably expect to see Amazon and eBay take things more seriously.

I am grateful to the “fight against VAT fraud” campaigners, who have done so much to highlight the matter in great detail and who have brought forward case studies and other evidence. We have to take the matter seriously. HMRC has a duty to demonstrate that it is enforcing adequate measures to protect against VAT fraud, but online retailers must also recognise their responsibilities to society.

We have heard much about the figures from the campaigners, but the National Audit Office’s report on HMRC’s 2012-13 accounts stated that the total tax gap was estimated at £32 billion, of which £9.6 billion was related to VAT, equating to 10.1% of the actual VAT that could theoretically be collected. There is a wider point here about tax evasion, and we can all imagine the impact of £32 billion on the nation’s accounts and what it would do to the deficit and to our ability to invest in our public services. The NAO estimated that missing trader intra-Community fraud constituted between £0.5 billion and £1 billion of the VAT tax gap, but that was before the growth of these largely Chinese online retailers. It would be safe to assume that the figure has increased significantly over the past two or three years.

The hon. Member for Daventry (Chris Heaton-Harris) already mentioned the fact that the “fight against VAT fraud” campaign has identified more than 500 fraudulent retailers, generating as much as £300 million in sales in 2014, and there is the potential for growth over the coming years. The figures are eye-watering and must be taken seriously. The Government have a responsibility to do that, but so do the platform operators. Corporate governance and corporate social responsibility best practices should lead to these institutions recognising their responsibilities in establishing a fair marketplace and one where they have a duty of responsibility to make sure that those using their platforms are legitimate, and are meeting their VAT obligations and their obligations in all areas of taxation.

There are also wider issues with some retailers which seek to mitigate their own responsibilities to pay tax in the UK through various mechanisms. While this country has welcomed the likes of Amazon into our marketplace and recognises the attraction of such operators in adding to consumer choice, Amazon and others must recognise their social responsibility and that paying an appropriate level of tax is the price of doing business in this country. In providing a platform for other retailers, Amazon, eBay and others have a duty to make sure that businesses established outside the UK, but who are warehousing and dispatching goods located in the UK, are paying VAT. Such ventures are classed as non-established taxable persons, often referred to as NETPs.

The “fight against VAT fraud” campaign, which was established by legitimate retailers, has made a number of recommendations. Among them is the registration of VAT numbers, as mentioned by the right hon. Member for Arundel and South Downs, which must happen and could be done quickly. The campaign also states that a failure to display a VAT number and VAT status could be seen as a breach of UK tax laws, a theory which is informed by the rules and regulations under the EU distance selling arrangements. The issue was the subject of a parliamentary question, answered on 16 December, when the Minister said:

“There is no requirement in tax legislation for a VAT-registered person to declare to a customer that they are registered or to provide a VAT registration number, unless they make a supply to another VAT-registered person, in which case they are obliged to issue a VAT invoice including their VAT number. However businesses are required to comply with the Electronic Commerce Regulations 2002 concerning the provision of this information.”

That should be revisited. It would at the least provide some transparency. If retailers have to have a VAT number when selling to other VAT-registered persons, what is the issue in extending that to all transactions?

The matter needs to be considered in the wider context of the debate on tax evasion and avoidance. The Scottish Government’s approach to devolved taxes demonstrates that we are serious about tackling tax avoidance in Scotland. We have taken a simple, clear but robust approach to tackling artificial tax avoidance. The Scottish general anti-avoidance rule was established by the Revenue Scotland and Tax Powers Act 2014 and will allow Revenue Scotland to take counteraction against tax avoidance arrangements that are considered to be artificial, even if they otherwise operate within the letter of the law. The Scottish general anti-abuse rule is significantly wider than the corresponding UK GAAR as set out in the Finance Act 2013, which is based on a narrower test of “abuse” rather than “artificiality”. Sadly, we have only limited powers to tackle tax avoidance on the land and buildings transaction tax and the Scottish landfill tax, but I expect that is a debate for another day. Under the current powers, including the Calman income tax powers, we have no power to tackle income tax avoidance, which falls to the UK Government and HMRC. Even after Smith is implemented, because income tax will be shared, we will still not have powers to tackle avoidance, which will also remain with the UK Government and HMRC.

The UK tax system is complex and inefficient. Unnecessary complexity, through exemptions, reliefs, deductions and allowances, creates opportunities for tax avoidance. HMRC attributed a £7.1 billion tax gap to evasion and avoidance in 2013-14 out of a total tax gap of £34 billion. Isobel d’Inverno, convener of the tax law sub-committee of the Law Society of Scotland and director of corporate tax at Brodies, has said:

“The general anti-avoidance rule that we have got in the Scottish legislation is much fiercer than the UK one. It’s a very much firmer ‘Keep off the grass’ sign than the UK one is. Revenue Scotland also appears very determined to collect all the tax that is due. There’s a whole series of different things that suggests they're going to have a far more pro-active approach to stopping tax avoidance.”

In conclusion, we are dealing here with the specific issue of the VAT avoidance of many online retailers, but we are all responsible, particularly the UK Government, for making sure that we act tough on tax avoidance.