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Continued scrutiny of e-commerce driving up HMRC VAT recovery, says expert


HM Revenue and Customs (HMRC) recovered almost £3.2 billion in underpaid VAT from large businesses last year, thanks in part to its continued focus on compliance by e-commerce companies, an expert has said.

Although the £3.17bn collected in 2015/16 was slightly less than the £3.38bn it collected the previous year, VAT enquiries remain the highest yielding area of investigation by HMRC's Large Business Directorate, which oversees the tax affairs of the largest and most complex firms, according to tax expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com.

"Unlawful underpayment of VAT by big businesses is a major concern for HMRC," he said. "Left unchecked, it could cost the Treasury dear."

The UK 'VAT gap', or difference between the amount of tax which is collected and that which HMRC believes to be due, was £13.2bn in 2015/16, according to the most recent estimates. Although fraud and aggressive avoidance would account for some of this figure, the "huge complexity" of the tax and its real-time nature often made it difficult for businesses to understand their obligations, Mellor-Clark said.

HMRC's powers to tackle the perceived VAT gap, with a particular focus on overseas e-commerce sites, were strengthened last year. HMRC can now require overseas businesses to appoint a UK-based VAT representative who will be liable for the tax; and can pursue online platforms for the VAT debts of individuals overseas traders on a 'joint and several' liability basis.

"The raft of new measures that are being introduced to clamp down on abuse by overseas retailers via online platforms gives HMRC many more weapons in its arsenal. By making online marketplaces take action or be held liable, it's going to be much harder from now on for businesses who are avoiding paying VAT on sales to UK consumers to continue trading in the UK," he said.

HMRC will usually give an online platform a period of 30 days to take 'remedial' measures against the operator using its platform before enforcing joint and several liability, according to guidance on the changes which it published last year.

"This seems to be a method to encourage compliance in the sector rather than, necessarily, collecting large amounts of VAT from the operators of online marketplaces," said Mellor-Clark.

"While perhaps not a 'nuclear' option, the measure doesn't seem to be intended for deployment on a 'first strike' basis and is more likely to be used as a deterrence measure. However, it would not surprise me if HMRC looks to claim a few large scalps in the early days to show that it means business. It already uses similar joint and several measures to combat alcohol excise duty fraud and also so-called MTIC ['missing trader'] VAT fraud," he said.

The government also recently confirmed its intention to introduce a new flat rate penalty for VAT fraud as part of the 2017 Finance Bill. The new penalty, which is based on the existing 'knowledge principle', will end the current distinction between deliberate and 'careless' frauds, and will apply regardless of whether a business or an officer of that business knew, or merely ought to have known, of the existence of fraud.

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