Online retailers like Amazon and eBay have come under fire for not doing enough to make their online marketplace sellers pay the right tax, after MPs urged HM Revenue and Customs to “step up” and confront the issue.
MPs said a "prolonged failure" by HMRC to collect the right amount of VAT from online sellers outside the EU has cost billions in lost revenue and is "undermining" British businesses.
HMRC estimates that online VAT fraud and error cost between £1 billion and £1.5 billion in lost tax revenue in 2015-16 alone, according to the findings of a National Audit Office (NAO) investigation.
The NAO also accused Amazon and eBay of failing to remove foreign sellers from their online marketplaces even after trading standards officers identified those not charging VAT on goods sold to British customers.
Amazon and eBay have said the problem was due to a lack of awareness on the part of overseas sellers and they are now educating traders and providing tools to help with VAT reporting and compliance.
VAT is charged at 20 per cent and retailers must collect the tax and pay it to HMRC. Online retailers take a commission from their marketplace sellers in each transaction.
Foreign retailers trade on online marketplaces because their goods can be shipped to the UK and stored in the marketplaces’ warehouses before they are ordered to make local delivery quicker.
Products already in the UK at the point of sale are liable for VAT, and while the NAO estimated there were between 500 and 3000 of these warehouses across the country, the HMRC could not verify how many fulfilment houses there were.
There have also been no prosecutions for online VAT fraud to date, but civil operations included 279 investigations of businesses and 373 compliance interventions over the past year.
The NAO report said that more than 14 per cent of retail sales were online, and half of that was done via online marketplaces rather than directly on the retailers’ websites.
Public Accounts Committee chairwomen Meg Hillier urged HMRC to "finally step up and act to confront this growing problem".
"HMRC's prolonged failure to collect the right amount of VAT from online sellers outside the EU resulted in lost tax revenue of up to £1.5 billion in 2015-16,” she said.
"This is a double whammy for taxpayers. Overseas sellers who avoid VAT undercut the prices charged by small, law abiding British businesses hitting British jobs.
“Add to that the billions in lost tax which could be spent on health, education and other vital services and no one wins except the VAT avoiders.
"I am very concerned that this undermines the competitiveness of British businesses at a time, post-Brexit, when the UK's economy needs all the support it can get to compete outside the EU."
An HMRC spokeswoman said: "The UK has led the way in holding online marketplaces jointly liable for VAT evaded overseas, and new reforms will secure £875 million for the UK taxpayer.
"In less than a year, those registering for VAT has risen tenfold to 8000 in 2016."