New Anti-VAT Fraud Measures: Joint and Several Liability Revisited
The days of gargantuan levels of MTIC fraud have passed. The reverse charge measure introduced in 2007 eliminated the problem – in the UK at least – in the two areas most afflicted: the wholesale trades in mobile telephones and computer components.
Although the fraud spread into other commodities (soft drinks, metals, razor blades and designer clothes are but a few of the goods that have been “carouselled” in the continued pursuit of MTIC rich pickings), where a particular commodity has posed an unusually significant threat, the Revenue has again acted specifically to address that particular threat. In 2009, carbon credits were added to the reverse charge derogation, and earlier this year the mechanism was also applied to the trade in Electronic Communication Services, including Voice over Internet Protocol (VoIP) “airtime”. These intangibles were particularly well-suited to MTIC fraud.
But VAT fraud has continued to develop in other ways. The increased use of e-commerce to retail customers through “online marketplaces” (for example Amazon and eBay) has presented a growing challenge to VAT fraud prevention, extending beyond the wholesale trade and the traditional MTIC model. More than 20% of non-food retail spending in the UK now takes place online.
The basic problem is that as third party sellers on UK online marketplaces, overseas businesses can sell goods to UK consumers in circumstances where the goods are in the UK (in a storage facility or “fulfillment house”) at the time of sale. The sales therefore attract UK VAT. However, as the seller is based overseas, it is easier to evade the correct payment of VAT and duty. HMRC’s traditional compliance powers are difficult to apply to overseas businesses.
Hence significant VAT revenue is lost, and the overseas fraudster is able unfairly to undercut businesses trading lawfully in the UK.
Two new preventative measures were therefore introduced in the Budget, and became law on 15th September.
Firstly, section 123 of the Finance (No.2) Act 2016 amends section 48 of the Value Added Tax Act 1994 (“VATA”) so as to:
- Allow HMRC to direct non-EU businesses to appoint a VAT representative who must be established in the UK;
- Require that the VAT representative be appointed by a speciﬁc date;
- Require security from a non-EU business either in addition to, or instead of, appointing a VAT Representative. (The power to require security from any business making supplies in the UK is already contained in paragraph 4 of Schedule 11 to the VAT Act 1994); and
- Give HMRC the power to refuse the appointment of a VAT Representative if they do not consider that person to be ‘ﬁt and proper’ (in accordance with criteria to be published at a later date).
The VAT representative is held liable for all aspects of the trader’s VAT.
Secondly, and of particular note, section 124 of the same Act introduces three new sections into VATA (sections 77B, C and D) which empower HMRC to issue a notice to the operator of the online marketplace through which the sale is made. The notice will impose joint and several (“J&S”) liability on the operator for the VAT due in respect of the sales made by the overseas trader.
However, the notice will allow a period of time (normally 30 days) for the operator of the marketplace to take remedial action to address the non-compliance by the trader, before that J&S liability is enforced by assessment. That remedial action may be to secure the trader’s VAT compliance, but the requirement is also satisfied by simply removing the non-compliant trader from the online marketplace.
The Joint and Several Liability provisions in respect of specified goods, introduced in 2003 as section 77A of VATA, were not employed as frequently as originally anticipated, owing in large part to the identification of the principle in Axel Kittel v Belgian State (C-439/04) and Belgian State v Recolta Recycling SPRL (C-440/04).
It will be interesting to see how, and to what extent, this new and discretionary J&S provision will be applied. It is of note that the s77A and Kittel provisions apply to traders in the transaction chain. This new J&S provision applies differently, to a third party that is not a part of the transaction chain itself.
HMRC’s Guidance Note explains that the Commissioners will first attempt to secure compliance directly with the overseas business by making contact with it and, where appropriate, compulsorily register it for UK VAT, direct it to appoint a UK VAT representative, and/or require security. Only when the overseas business continues to be non-compliant, will contact be made with the online marketplace. Furthermore, where a VAT representative has been held liable for the VAT due, HMRC will first seek to collect the VAT from the representative.
It is also made clear that in most cases, HMRC will attempt to contact, and work with, the online marketplaces to warn them of any potential joint and several liability notice. However, where a signiﬁcant risk to VAT revenue is identiﬁed, a formal notice may be issued to the online marketplace without warning.
But whether HMRC take the gentle approach, or the more aggressive one, the fact remains that no liability attaches to the marketplace operator until the notice period expires.
It might be argued that the effectiveness of both new provisions is questionable. The online marketplace operator can escape liability by removing the trader from its site, and the fraudulent overseas trader can both escape liability, and continue selling its goods online, by reincorporating into a new entity and continuing where it left off. This well-known technique may also be employed in circumventing the amended powers in s48.