HMRC and HM Treasury have announced a joint consultation on possible options for how a ‘split payment system’ could be used to combat online VAT fraud. A split payment system would allow VAT to be extracted from online payments in real time, helping to reduce the VAT gap.
One of the main issues with a split payment system is deciding at which point to split the VAT from the gross payment, whether this is with the issuing (customer’s) bank, a merchant acquirer, a payment service provider, a card scheme or the merchant’s bank.
Overseas sellers are often able to avoid paying VAT as they are based outside the UK’s jurisdiction therefore it is important that the party with which the split is taking place is within the UK’s jurisdiction. HMRC has developed three possible options for collecting as close to the full amount of VAT as possible. These include a standard rate split, a flat rate scheme and a net effective rate.
- The standard rate approach involves assuming that every transaction is liable to UK VAT at the standard rate, currently 20%. This is the easiest option for the party performing the split, as the amount of each transaction to be withheld is always the same.
- The second option is to mandate that overseas sellers must use the flat rate scheme, using one of a small number of new flat rates for this purpose. This would include businesses which are over the current maximum threshold for eligibility for the existing flat rate schemes. This option is also simple for the party performing the split, while also being more proportionate as it does not withhold more tax than is due in the first instance.
- However any individual business with input tax higher than average for its sector would pay slightly less tax under a flat rate than if it accounted for VAT in the usual manner.
- The net effective rate is a rate specific to each individual overseas business, rather than an average across particular sectors. Under this option, each overseas business would be responsible for calculating its own rate by comparing its total output tax and input tax for the previous year, and communicating this to the party responsible for effecting the split, and to HMRC.
- At the end of the year, the business would submit a return to HMRC in the usual manner, and pay or be refunded any difference. The figures in the return would then be used to calculate the net effective rate for the following year. The party effecting the split would then apply this rate to all that merchant’s sales, and would only have to alter the amount it withheld once per year.
The consultation closes on 29 June 2018.
In addition, HMRC is interested in how it can work with online platforms to promote better compliance among their users. HMRC wants to understand how platforms interact with their users currently, including what the platforms know about their sellers, and understand more about attitudes to tax among people earning money through the platforms. While this is still only a consultation, it opens the door for the Government to insist that online platforms deduct VAT from sales. The proposals would then oblige sellers to prove that they are eligible to claim the deducted sums back. This isn’t going to be an easy task to approach and it certainly raises the question of whether online platforms will have to deduct VAT from all sales, or just those made by sellers they think are businesses.
Some online sales may not attract any tax liability i.e. selling unwanted personal items or gifts, however individuals can be at risk of falling within the legal definition of trading without understanding that their activities have become taxable. HMRC is currently asking how the tax authority and online platforms can work together so that users are fully aware of their tax obligations to help close the tax gap, but it seems clear that this will lead to further enforcement activity in the autumn 2018 Budget.
This consultation closes on 8 June 2018.