UK businesses are being adversely affected by overseas companies that engage in “unfair and illegal” tax practices using online trading platforms, according to a report from the Public Accounts Committee.

The committee said that such practices have been active for a number of years, with the committee first raising the issue in 2013, and campaign groups having drawn attention to the abuse prior to this time.

HMRC has estimated that UK taxpayers have lost £1bn-£1.5bn in 2015-16 as a result of VAT fraud, with online sellers failing to charge VAT, undercutting the prices offered by UK businesses by up to 20%. Consequently, a number of business have had to make staff reductions or have seen their businesses close down.

The Public Accounts Committee said that HMRC has been “slow to act” and that “high profile enforcement” is necessary to “send out the message that the UK is not a soft touch for VAT fraudsters”. It called on HMRC to be “tougher” on online marketplaces that have warehouses based in the UK, and which many fraudsters use to avoid charging VAT.

The committee also challenged HMRC’s assertion that the revenue authority’s new powers would improve the situation, notably joint and several liability, the Fulfilment House Due Diligence Scheme and the split payments method of collecting VAT. These measures would “not product instant results” and there was “no guarantee” that the measures would be sufficient to tackle the problem, said the committee.

In the report, the committee made six recommendations to HMRC for dealing with VAT fraud.

1. Produce an updated estimate on scale and impact of VAT fraud tax gap

The Public Accounts Committee said that HMRC’s estimate of the VAT fraud impact is “out of date and flawed”. The National Audit Office and Office for Budget Responsibility had concluded that the revenue authority’s 2015-16 estimate was “subject to a high level of uncertainty”, and while online sales are increasing, HMRC currently has no plans to update their estimate of the VAT fraud tax gap.

The updated estimate should be completed by March 2018, and should consider the wider impact of VAT fraud on the economy.

2. HMRC needs ‘urgency’ to tackle online VAT fraud

Specifically, HMRC should leverage its existing powers, speed up the introduction of new measures, and explore further regulations that could be introduced to ensure that online marketplaces are liable for VAT evasion.

3. Stronger collaboration with online marketplaces

Campaign groups Retailers Against VAT Abuse Schemes and have disputed how proactive online marketplaces Amazon and eBay have claimed to be in tackling VAT fraud, despite the companies insisting that they have taken several preventative measures to ensure “a level playing field for all sellers”.

The committee said it was “bewildering” that large companies had taken “such little action to date”, highlighting that Amazon only started collecting VAT numbers for non-EU sellers six months ago.

HMRC currently has little access to the data needed to identify traders that aren’t compliant with VAT regulations, and therefore needs to improve transparency with online marketplaces. The committee has recommended that HMRC implement an agreement by March 2018 that establishes “collaborative working arrangements” between the revenue authority and online marketplaces. The agreement should include a provision for online marketplaces to ensure that non-EU traders selling goods to customers in the UK have a valid VAT number, in cases where the goods are already in the UK.

4. Assess effectiveness of new powers in combatting VAT fraud

The committee said that it was not clear how HMRC planned to assess the effectiveness of its new powers in reducing VAT fraud, and should produce a report by March 2018 that identifies short and long-term targets, as well as the amount of VAT collected from newly registered traders, and how much unpaid VAT has been collected from previous years.

5. Understand the scale of the fulfilment house industry

As HMRC is not currently aware of the scale of fulfilment houses in the UK, it is not able to “systematically target the most blatant route for online VAT tax evasion”. The revenue authority estimates the number of warehouses in the UK to be between 500-3,000, but the committee has recommended that HMRC takes a “definitive assessment” of the scale of the fulfilment house industry, and how it will enforce warehouses to register with HMRC under the Fulfilment House Due Diligence Scheme, due to enter into effect in April 2018.

6. Ability to respond to new challenges as a result of Brexit

The committee expressed concern that as VAT evasion is already a complicated issue, HMRC does not have the ability to respond to new VAT challenges caused by Brexit. As uncertainty is already rife about the UK’s exit terms from the EU, it is difficult to assess its potential impact on VAT fraud.

HMRC said it was “confident” that it could identify emerging risks, but the committee said it was “sceptical” about the revenue authority’s ability to do so given current resources and skillset. The committee would therefore “regularly monitor” HMRC’s progress in preparation for Brexit.

HMRC crackdown only the ‘tip of the iceberg’

Speaking at the PfP Tax Investigations Conference last week, executive chairman of HMRC Edward Troup, reinforced HMRC’s belief that it could tackle the problem, stating that the revenue authority’s crackdown on internet platforms was just the “tip of the iceberg”. Highlighting that HMRC had opened investigations into more than 2,500 internet retailers suspected of VAT fraud, Troup said it would take a stance of no compromise, ensuring that cases are taken to court whenever necessary and that cases settled outside of court are only done so when HMRC receives what it believes it is owed.