Tackling online VAT fraud and error inquiry

HMRC’s estimate of the impact of online VAT fraud is out of date and flawed. The National Audit Office (NAO) reported that HM Revenue & Customs (HMRC) estimate of the scale of the problem in 2015–16 was subject to a high level of uncertainty, as did the Office for Budget Responsibility (OBR). Furthermore, HMRC’s estimate does not account for the wider effects of online VAT fraud, such as distorting fair competition in the market and undermining perceptions of equity and fairness in the tax system. Legitimate businesses are struggling to compete with sellers who do not charge VAT when they should and are thus gaining a 20% price advantage. Online sales are continuing to increase (in 2016, 14.5% of all UK retail sales were online, up from 2% in 2006) but HMRC has no plans to update its estimate of the tax lost due to online VAT fraud. HMRC told us it carries out threat assessments of new risks, and is constantly looking at how it can be more responsive. Recommendation: HMRC should, by March 2018, produce an update of its estimate of the scale and impact of the online VAT fraud tax gap, incorporating new evidence and assessments of new risks where applicable. It should also consider the impacts on legitimate business and wider impact on the economy such as job losses when a business is struggling.

HMRC has been slow to get to grips with the problem and is not yet doing enough to tackle it. Previous Committee reports have highlighted the problem of online VAT fraud as a growing risk. Online VAT fraud leads to a significant loss of revenue to the Exchequer, depriving public services of funds at a time of austerity. However, HMRC has only recently begun to take the problem seriously. Rather than try to use its pre-existing powers, HMRC waited until the introduction of new measures under the Finance Act 2016 before it attempted to hold online marketplaces responsible for VAT which had been fraudulently evaded by traders on their marketplaces. Even so, HMRC has been too cautious in using these new powers. HMRC has not named and shamed non-compliant traders and so far has not prosecuted a single seller for committing online VAT fraud. HMRC told us that it needs new powers to enable it to close the online VAT fraud tax gap to a level comparable to that for VAT as a whole (9.6% in 2015–16). The Government has proposed a new method for collecting VAT (known as split payments) and this could be an effective solution to the problem but the introduction of such an approach is a long way off. The European Union (EU) is also currently considering placing liability on online marketplaces for VAT due on online sales. Recommendation: HMRC should inject much more urgency to tackling the problem of online VAT fraud by: • making much stronger and more extensive use of its existing powers, especially third party liability, • speeding up the introduction of new measures, such as the split payment method of collecting VAT, and 6 Tackling online VAT fraud and error • exploring new measures. In particular, HMRC needs to focus on ensuring the marketplace platforms are liable for VAT evasion. One option would be for HMRC to require online marketplaces to withold VAT when a sale is made and then pass it directly to HMRC.

Online marketplaces and HMRC are not doing enough to work together to tackle the problem, and online marketplaces continue to earn their commissions and therefore profit from people who are defrauding the British taxpayer. Amazon and eBay assured us that they stopped all non-compliant sellers from using their sites as soon as HMRC notified them. Amazon and eBay told us it was in their own interest, given the risk to their reputations, to ensure a level playing field for all of their sellers and remove ‘bad actors’ from their sites. Amazon and eBay explained they carry out a number of checks on sellers that operate on their platforms, such as validating sellers’ VAT numbers; linking related accounts to get a complete picture of sellers’ activity; and checking addresses to stop previously shut-down sellers re-emerging in a different form. Amazon and eBay claimed they were proactive in seeking out those without VAT numbers, with eBay policy in particular going beyond what it is legally required to do. However, in a written submission received after our evidence session, Retailers Against VAT Abuse Schemes (RAVAS) and VATfraud.org took issue with a number of the claims made by Amazon and eBay about how proactive they were in tackling rogue traders using their platforms. Online marketplaces could, in principle, carry out further checks to assess compliance of sellers on their platforms with UK VAT tax law, though HMRC input would be needed to fully establish non-compliance. Amazon and eBay told us they plan, over the next 6 months, to increase their technological capacity and that they saw data-sharing as an effective way to tackle the problem. This is not, however, a new issue–so it is bewildering to us that these big companies have taken such little action to date. Amazon for example only started collecting VAT numbers from non-EU sellers six months ago and told the Committee that knowing whether a non-EU seller has a valid VAT number is not a critical data point. HMRC told us there is not complete transparency between HMRC and online marketplaces, and it does not yet have access to all the data it needs from online marketplaces to identify non-compliant traders. It has faced resistance from online marketplaces in sharing data that are not held within the UK’s jurisdiction. In the meantime, Amazon and eBay, amongst other online marketplaces, continue to profit from fraudulent activities taking place on their sites. Recommendation: HMRC should, by March 2018, put in place an agreement, applicable across the whole online marketplace, that sets out the collaborative working arrangements between HMRC and the online marketplaces, including details of co-operation, data sharing and expectations of a prompt response to evidence of non-compliance. This should include a requirement for all online marketplaces to ensure that a valid VAT number is showing for any non-EU trader selling goods to customers in the UK, where those goods are already in the UK. In the absence of a legal requirement to do so we would expect online marketplaces to implement this measure voluntarily. Tackling online VAT fraud and error 7

It is not clear how HMRC will assess the effectiveness of its new powers in reducing the level of online VAT fraud or whether it will clawback VAT unpaid in previous years from newly registered traders. Professor de la Feria, an expert in tax law, told us the new legislation will not solve all the problems but will be helpful, and that it would be reasonable to expect the impact of the new joint and several liability measures, introduced in September 2016, to become apparent within a year. HMRC highlighted to us the increase in new VAT registrations (from 700 to 17,500) since the new measures came into force last September as evidence of a positive impact. HMRC told us it expects to collect £50 million more VAT, in 2017, from those traders that have recently registered for VAT. However, we stressed that HMRC needs to check whether all the newly registered sellers have submitted returns and paid the correct VAT due, including clawing back previously unpaid VAT, going back as many years as necessary. Even if it is collected, the additional amount is a small proportion of the total loss, which HMRC estimates to be £1 billion to £1.5 billion. HMRC does not know enough about the reasons why online VAT fraud and error happens, such as the extent to which it is deliberate or unintentional. RAVAS told us that sellers were sceptical that online marketplaces would ever be held liable for any VAT evaded by sellers on their platforms under the new joint and several liability measure. Recommendation: HMRC should assess the effectiveness of its response to the problem of online VAT fraud and report to the Committee by March 2018, including: • setting targets, short and long term, for reducing the amount of VAT lost through non-compliant online sales; and • telling us how much it has collected from newly registered traders, including amounts of unpaid VAT from previous years.

HMRC does not know how many fulfilment houses are in the UK and is therefore unable to systematically target the most blatant route for online VAT tax evasion. Overseas sellers often choose to export goods to the UK and store them in fulfilment houses (warehouses where goods can be kept before delivery to customers), before selling these goods to UK customers through online marketplaces. The VAT rules require that all traders based outside the 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. Fulfilment houses are therefore a key part of the transaction chain between sellers based outside the EU and consumers in the UK. Some online marketplaces, such as Amazon, also own and operate their own fulfilment houses. HMRC does not know how many fulfilment houses there are in the UK, estimating the number to be somewhere between 500 and 3,000. The Fulfilment House Due Diligence Scheme, due to come into effect in April 2018, will require fulfilment houses to register with HMRC. However, it is not clear how HMRC plans to enforce this requirement. HMRC was receptive to our suggestion that it would make sense to require overseas sellers registering for VAT to specify which fulfilment houses they work with. 8 Tackling online VAT fraud and error Recommendation: HMRC should, as a pre-requisite to the implementation of the Fulfilment House Due Diligence Scheme, undertake a definitive assessment of the scale of the fulfilment house industry, and how it intends the process of registration for the scheme to work efficiently and effectively.

Online VAT tax evasion is already a complicated issue, and we are concerned about HMRC’s ability to deal with new challenges to the problem which may be posed by the UK’s exit from the EU. There is considerable uncertainty over the exact terms on which the UK will leave the EU. It is therefore difficult to be sure of its effect on online VAT fraud. Sellers based in the EU may end up operating under the same VAT terms as currently apply to non-EU sellers and therefore may also be tempted to not charge VAT in the same way. Evidence exists, such as the recent European Anti-Fraud Office (OLAF) report on customs duties, that highlight significant control weaknesses at the UK border even before the UK exit from the EU. Border controls will remain important to the problem of online VAT fraud even when the other measures (joint and several liability, the Fulfilment House Due Diligence Scheme and split payments) are in place. HMRC expects leaving the EU to pose four big challenges to the department as a whole: customs; indirect taxes, particularly VAT; data sharing with other EU countries; and the welfare state (with respect to treatment of EU citizens). The Department told us it is confident about its ability to identify new emerging risks but we remain sceptical about HMRC’s ability with its current resources and skill set to rise to the many challenges that are ahead. Recommendation: The Committee intends to regularly monitor HMRC’s progress in preparing for the UK exiting the EU and expects HMRC to be in a position to update us at future appearances. Tackling online VAT fraud and error 9 1 Impact and HMRC’s response

Since HMRC’s estimate of losses in 2015–16, there has been further significant growth in online sales.13 Non-store online sales in the UK grew to £26.1 billion in 2016 following an annual growth average of 18% in the preceding five years.14 We asked HMRC about its plans for a more up-to-date assessment of the size of the problem. HMRC explained it had no plans to undertake another exercise to generate a more precise estimate of the size of the problem but agreed to keep it under review.15

Online VAT fraud and error losses of up to £1.5 billion equate to £7.5 billion-worth of sales, about a third of all sales that take place on online marketplaces.16 HMRC acknowledged the level of the tax gap in relation to non-EU sellers selling on online platforms is significantly higher than the ‘normal’ level of tax gap across the whole of the VAT tax regime (9.6% in 2015–16).17 While Amazon and eBay, the two big online marketplaces in the UK, were aware of HMRC’s estimate of the scale of the problem, eBay told us that it could not comment on the validity of HMRC’s estimate. eBay informed us that, in the previous year, it had suspended 184 seller accounts responsible for £4.6 million of revenue.18 Amazon told us that it had suspended 416 sellers responsible for about £92 million of revenue and £18 million of VAT.19 7 Qq 1–2, 29, 78, 131; C&AG’s Report, para 1 (page 6) 8 Q 112; C&AG’s Report, para 1.20 9 Q 2; C&AG’s Report, para 1.22 10 Qq 1, 3, 19–20 11 Qq 133, 137 12 Q 2 13 Q 79; C&AG’s Report, para 1.15 14 C&AG’s Report, para 1.15 15 Qq 108–110 16 Q 107 17 Qq 45–47 18 Qq 29, 107 19 Q 136 Tackling online VAT fraud and error 11 HMRC’s response to the problem of online VAT fraud and error

The previous Committee first identified the problem of online VAT fraud in 2011.20 We have seen evidence from various sources that suggests HMRC’s response to online VAT fraud has lacked urgency and rigour. RAVAS told us that the reason campaign groups such as theirs exist is because they have not seen enough action from HMRC in the face of overwhelming evidence of tax evasion.21 RAVAS explained how easy it is to identify companies that appear to evade VAT on their online sales.22 Our experience from a mystery shopping exercise that we carried out also confirmed the ease of identifying apparent tax evaders.23 A recent report issued by the European Anti-Fraud Office (OLAF) highlighted significant weaknesses in the policing of the UK borders.24

We also heard concerns from Professor de la Feria that HMRC has not been doing enough to tackle this problem despite the required legislation being in place. Professor de la Feria suspected this was due to HMRC considering that it was not cost-effective to pursue this type of fraud.25 Professor de la Feria told us that the existing laws, even before the introduction of the new 2016 measures, provided scope for HMRC to hold online marketplaces and fulfilment houses to account for the fraudulent activities that these marketplaces and fulfilment houses “should have known” about.26 Professor de la Feria highlighted the difficulties of tracking down sellers that are based outside the EU to enforce compliance with tax laws. To help address this problem the EU Council is planning to introduce a new third-party liability rule effectively making the online marketplaces responsible for accounting for VAT including any that is uncollected. HMRC considers that this measure could be helpful but that there are more strategic solutions to the problem, such as split payments.27

The Department explained that there are three main parties involved in the particular type of online transactions suffering from VAT fraud: a seller, a fulfilment house and a consumer. HMRC told us that it has been seeking to develop a systemic solution that would require all three main parties to comply: joint and several liability notices to tackle sellers’ responsibilities, the Fulfilment House Due Diligence Scheme and split payments on the consumer.28 However, HMRC, contrary to the views of Professor de la Feria, informed us that it does not yet have all the powers that it needs to tackle the problem.29 HMRC is exploring further options for tackling online VAT fraud, such as the split payments method for collecting VAT. Under this method, a financial intermediary, such as a bank or the online marketplace, would have to deduct the VAT before paying the sale proceeds to the non-EU seller, with the intermediary then being responsible for paying the VAT element to HMRC. HMRC is analysing the evidence from its consultation on split payments but told us that, under current EU law, it cannot implement the measure.30 20 Q 79 21 Qq 3, 18–19, 91 22 Q 4 23 Qq 74, 84 24 Qq 2, 12, 18; OLAF, The OLAF report 2016 25 Qq 7, 12–14, 17, 21 26 Qq 14, 21; C&AG’s Report, paras 3.6–3.8 27 Qq 13, 102–103 28 Q 42 29 Qq 45, 47, 76, 89–90 30 Qq 35–36, 38–40, 82, 100–103; C&AG’s Report, para 3.18 12 Tackling online VAT fraud and error

HMRC assured us that it welcomes intelligence about potential online VAT fraud, such as that from our mystery shopping exercise and from other sources, and that it investigates every case. It takes HMRC at least 25 days from the point of receiving intellegence from an informant to be able to issue a joint and several liability notice as the Department will need to carry out an investigation to establish whether there is a case of non-compliance.31 HMRC informed us that, by the end of July 2017, it had received 1,187 pieces of intelligence from organisations like RAVAS and VATfraud.org, of which fewer than three in five had identified potential non-compliant sellers.32 We asked HMRC why, even in the absence of prosecutions, it does not name and shame sellers who evade VAT. HMRC responded that it has the powers to name deliberate defaulters but certain criteria, as set by Parliament, have to be met about who can be named. HMRC also questioned the effectiveness of naming and shaming in cases of online VAT fraud.33 Online marketplaces

Amazon and eBay are two of the largest and most well-known online marketplaces in the UK, though there are many others. RAVAS told us that it is inconceivable that online marketplaces are not aware of the fraudulent activities that take place on their platforms.34 We questioned Amazon and eBay as to whether they have been, for a long time, ignoring the problem of online VAT fraud. Both told us that they take this problem very seriously as it creates legal, financial and reputational risks to them. Amazon and eBay told us they have accordingly dedicated a lot of resources to tackle this problem to ensure all ‘bad actors’ are removed from their platforms. They told us that they work closely with HMRC, blocking sellers from their platforms when they receive notifications from HMRC that sellers have broken the law.35 eBay told us it has received 77 notices from HMRC to date and blocked 184 sellers. In addition, eBay claimed it had taken action against a further 1,077 sellers in the past few years. Amazon told us that, of its 46,000 non-EU sellers, it had received more than 400 notices from HMRC to take down sellers and that it acted within 24 hours to do so.36

eBay was keen to emphasise that its internal checks go above and beyond the legal requirements. For example, eBay claimed it requires all foreign sellers to display a VAT number, validates these numbers via reference to the VIES system (the European Commission VAT database) and links the various accounts of non-compliant sellers to capture all their activities.37 Amazon explained to us that it believes the majority of sellers want to be compliant while there will always be a minority who will break the law intentionally. Amazon told us that it provides the first group with extensive educational tools and other initiatives, such as a ‘technology tool’ which makes it easier to comply with the tax laws. To tackle the intentional rule-breakers, Amazon told us that it has so far shared information with HMRC on all of its non-EU sellers who made a sale in 2016 to enable further investigation and that it will provide HMRC with the equivalent data on 2017 sales for those same sellers, as well as for new non-EU sellers who have made a 31 HM Revenue & Customs (VAT0002) para 2 32 Qq 87, 93 33 Qq 94–95; C&AG’s Report, para 7 (page 8) 34 Qq 10–11, 14 35 Qq 29, 33, 69, 132–133, 135, 139–140 36 Qq 30–34, 50 37 Qq 31–32, 63–64, 66, 71 Tackling online VAT fraud and error 13 sale since the end of 2016.38 Amazon maintained that it has processes in place, such as checking IP and legal addresses, to prevent fraudulent sellers that have been removed from its platform re-emerging under the banner of another company.39 Amazon claimed it has detected and prevented 37 attempts to re-register, out of the 433 sellers whose accounts it had blocked following receipt of joint and several liability notices from HMRC.40 Amazon and eBay told us that they plan to introduce further technological enhancements and solutions, over the next six months, to enable them to scale up their activities and provide more powerful tools to detect and prevent online VAT fraud and error.41 Amazon told us that, in terms of VAT registration numbers, its policy until the last six or nine months had not been to actively collect VAT registration numbers, and that having a VAT number for a non-EU seller with stock held at its warehouse “is not a data point that we necessarily think is that critical”.42

Following our evidence session in September, RAVAS and VATfraud.org made a written submission to us taking issue with some of the statements made during the session. The submission made a number of points, including: • that there is no reason why online marketplaces cannot ensure there is a valid VAT number showing for any non-EU seller with UK stock; • that online marketplaces’ failure to do simple checks is exacerbated by poor enforcement of existing rules by HMRC; • claims that in practice eBay do not properly verify VAT numbers of traders; • disputing Amazon’s claim to us that it is not part of the supply chain; and • that HMRC had been insufficiently proactive in enforcement and shown apparent leniency towards Amazon and eBay.

We have published the full submission from RAVAS and VATfraud.org alongside this report.43

In terms of doing more to address online VAT fraud, Amazon and eBay told us that, irrespective of the extent of any checks they carry out, HMRC input would be needed to fully establish non-compliance, which is why data sharing is so effective.44 HMRC has sought both aggregate data, to gauge the extent of VAT evasion on the sites generally, and information regarding particular businesses.45 The Department confirmed the usefulness of the data that the marketplaces were sharing, which Amazon, for example, told us it supplied monthly in an agreed format that is helpful for investigations.46 HMRC told us that it wanted to see the kind of routine flow of data provided to it as described by Amazon, but also expressed reservations about how well this was working in practice. HMRC stressed that there was not yet complete data transparency from the marketplaces, and highlighted that sometimes online marketplaces would argue that data HMRC 38 Q 33; Amazon (VAT0003) 39 Qq 59, 86 40 Amazon (VAT0003) 41 Q 106 42 Qq 51, 52 43 RAVAS and VATfraud.org (VAT0004); VATfraud.org (VAT0005); VATfraud.org (VAT0001) 44 Qq 32, 34, 53, 74, 107 45 C&AG’s Report, para 2.13 46 Qq 41, 96 14 Tackling online VAT fraud and error wanted should not be supplied because it was not held within HMRC’s UK jurisdiction. HMRC told us that it would not agree with such arguments, but nevertheless did encounter them. HMRC said that it expected co-operation and for data to be supplied voluntarily, but if this was not the case then it would exercise its statutory powers and issue notices accordingly.47 In the meantime, online marketplaces, through their relationships with sellers and the commissions that they charge on transactions, continue to profit from fraudulent activities. Amazon, for example, organises regular presentations at Chinese trade fairs to recruit overseas sellers, has plans to buy a shipping company and fulfils orders and handles payments, which all suggest a very embedded relationship with the seller. Amazon was keen to stress that its focus was on not having ‘bad actors’ using its platform, so that there was a level playing field on which all sellers competed equally. After repeated questioning, Amazon confirmed however that when one of its sellers does not pay the VAT due, it still receives its commission on sales.48 47 Qq 97–99 48 Qq 124–140 Tackling online VAT fraud and error 15 2 New measures and future risks HMRC’s new powers

A number of new measures against online VAT fraud were included in the Finance Act 2016, principally joint and several liability for online marketplaces, which took effect in September 2016, and the Fulfilment House Due Diligence Scheme.49 Professor de la Feria told us that, while it is possible that some sellers who have been identified by HM Revenue & Customs (HMRC) as non-compliant, under the joint and several liability legislation, may start using other less well known online marketplaces, most consumers will continue to purchase goods from major platforms such as Amazon and eBay. The new measure should therefore still be effective in tackling a significant proportion of fraud that takes place on the major platforms and its impact should become apparent within a year of its introduction.50 Retailers Against VAT Abuse Schemes (RAVAS) was more sceptical regarding the effectiveness of the joint and several liability powers. Its representative told us that, in practice, it believed online marketplaces would never be held liable for any evaded VAT as they would always remove non-compliant sellers within the 30-day window they have to take action, after receiving a notification from HMRC.51

In terms of the impact of the new measures, HMRC told us that the new measures were clearly having an effect, particularly the joint and several liability notices. The number of overseas online sellers registered for VAT had increased from 700 at the end of 2015 to 17,537 at the end of August 2017. The Department had also issued 399 joint and several liability notices and all those sellers had been removed from the online platforms.52 HMRC is not yet aware what proportion of the recently VAT registered sellers had been trading in the past or whether they will be compliant in the future. We asked HMRC what it was doing to check the newly registered traders declared and paid over any previously unpaid VAT. The Department told us that it is monitoring and tracking the behaviour of the recently registered sellers to ensure that they submit their returns and make payments including historical liabilities, interest and penalties. We asked HMRC how many years it could go back. HMRC told us that it would depend on the nature of the non-compliance but, if fraud could be shown, then it could go back up to 20 years.53 HMRC told us that in the 2017 calendar year it will collect £50 million more VAT from the recently registered sellers. While this is a small amount of additional revenue compared to the total size of the problem, HMRC explained that it also collects revenue from other approaches, such as from those sellers it forces to register and from the enforcement operations of its National Imports Taskforce.54

HMRC has not yet been able to assess how much of the online VAT losses are due to lack of awareness, error or deliberate fraud.55 It expects the measures that came into effect in 2016 to reduce the online VAT fraud and error tax gap by a third to a quarter but stressed it would need further powers to reduce the gap further. HMRC has estimated the 2016 measures will generate a total revenue of around £875 million by 2020–21 and 49 Q 17; C&AG’s Report, para 3.3 50 Qq 8, 13, 17 51 Q 9, C&AG’s Report, figure 11 52 Qq 42, 80 53 Qq 114–116; C&AG’s Report, para 3.15 54 Qq 44–45, 111 55 C&AG’s Report, para 4 (page 7) 16 Tackling online VAT fraud and error around £350 million a year after that.56 HMRC did not provide a specific date when it would assess the effectiveness of the new powers, or a target reduction, but told us that it would evaluate whether it achieved its forecast yield.57 Fulfilment houses

The use of fulfilment houses in the UK, warehouses where goods can be stored before delivery to customers, makes it easier for overseas sellers not to charge VAT while enabling them to provide next-day deliveries to their customers. This is, as RAVAS told us, what every customer nowadays expects.58 If businesses sell goods located in the UK they must register for VAT in the UK, charge VAT to their UK customers and pay the appropriate amount of import VAT when the goods enter the UK.59 RAVAS told us it believed the huge volumes of Chinese goods stored in UK fulfilment houses were a major problem in relation to online VAT fraud.60 Some online marketplaces, such as Amazon, also own and operate their own fulfilment houses.61

HMRC will introduce the Fulfilment House Due Diligence Scheme (FHDDS) in April 2018. The Department explained to us that under this scheme all fulfilment houses will have to register, go through a ‘proper person test’ and check that any overseas sellers storing goods are VAT registered.62 HMRC told us it is confident that it will be able to implement the scheme.63

Although it plans to create a register of fulfilment houses under the new scheme, at the moment HMRC told us it is uncertain how many fulfilment houses there are in the UK. HMRC has estimated the number at between 500 and 3,000.64 HMRC told us that its estimate of 500 is based on strong evidence and that it has identified an additional 2,500 businesses in the UK that ‘look like fulfilment houses’. The onus for registration will be on the fulfilment houses if they wish to continue to operate. We suggested that overseas sellers who register for VAT should also provide HMRC with a list of the UK fulfilment houses they use. HMRC agreed that this was a good idea and that it will consider it.65 Exiting the European Union

The UK’s exit from the European Union (EU) will have significant implications for individual businesses and taxpayers in general.66 We asked Professor de la Feria about the risks that the UK’s exit from the EU may pose to the specific problem of online VAT fraud. Professor de la Feria explained that the weaknesses that already exist at the UK border, as highlighted in the 2016 OLAF report for example, will be harder to deal with once the UK leaves the EU. As a result, Professor de la Feria expected HMRC to require, for example, more resources, more staff and better IT systems to deal with the increased 56 Qq 80–81 ; C&AG’s Report, para 3.17 57 Qq 111–113 58 Q 9; C&AG’s Report, paras 1.9 and 1.11 59 C&AG’s Report, para 1.4 60 Qq 18, 83 61 Q 34 62 Q 42; C&AG’s Report, para 3.16 63 Q 100 64 Q 119; C&AG’s Report, para 6 (page 8) 65 Qq 119–121 66 Q 1 Tackling online VAT fraud and error 17 risks. Enforcement at the borders will remain a necessity even with all the other measures in place to tackle the problem of online VAT fraud (joint and several liability of online marketplaces, the Fulfilment House Due Diligence Scheme and split payments).67

HMRC told us that the government, in relation to the UK’s exit from the EU, will need to balance three considerations: security of the UK, raising of revenue and free flow of trade. HMRC has identified four areas where the UK’s exit from the EU will significantly affect it: customs, indirect taxes (particularly VAT), data sharing arrangements with other EU member states and the implications for residency laws and benefits.68

HMRC told us that it has made significant progress on customs-related issues, including the underpinning technology, the Customs Declaration Service. HMRC accepted that there are scenarios in which additional staff may be required. HMRC told us it was confident that it could complete any changes necessary to the customs system within the timeframe agreed to in the current negotiations. However, HMRC pointed out that one of the challenges of determing the effect on online VAT fraud was the uncertainty in the timing and terms of the UK’s exit.69

HMRC told us that it has confidence in its internal processes to identify potential new areas of fraud and risk. HMRC told us it has a team which looks at future developments that will affect its administration of tax and a risk intelligence directorate which identifies the key strategic risks. These are collated in HMRC’s ‘Strategic Picture of Risk’ which prompts HMRC to take appropriate actions to address the identified risks. It was in 2014 that this exercise identified that non-EU sellers using online marketplaces were driving an increasing part of the VAT gap. This then prompted HMRC to seek new measures to tackle online VAT fraud.70 67 Qq 2, 22–24 68 Q 25 69 Qq 25–28 70 Qq 104–105; C&AG’s Report, para 2.4 18 Tackling online VAT fraud and error