UK budget – extend marketplace deemed supplier VAT obligations?

The proposal is presented as a way to close long-identified loopholes, simplify compliance, and increase VAT revenue for the Exchequer. While the rationale is understandable, the implications for domestic sellers, micro-businesses and the wider e-commerce ecosystem are far-reaching and potentially damaging.

The challenges would include:

• forcing micro-businesses to VAT register
• Inflationary impact
• complex compliance for omni-channel sellers
• conflict with flat rate scheme
• sellers becoming credit refunds only

The proposal: a universal Deemed Supplier regime

Under the 2021 UK rules, marketplaces are deemed to make the supply to UK consumers when the seller is not established in the UK, and therefore they assume the VAT liability. UK-established sellers continue to fall under the standard VAT rules and benefit from the UK’s £90,000 registration threshold.

Amazon argues that this split model has become a structural weakness. Fraudulent sellers circumvent marketplace due-diligence checks by falsely claiming UK establishment, often using shell companies or minimal corporate footprints. Amazon estimates that around £3.2bn of annual sales escape VAT because establishment status is difficult to verify and easy to misrepresent.

Their proposed solution is to remove the need for establishment verification entirely by making marketplaces responsible for VAT on all B2C marketplace sales. In effect, marketplaces would become VAT collectors across the entire UK consumer e-commerce sector.

1. threshold risk: VAT imposed on micro-businesses by default

The most significant consequence of a universal Deemed Supplier model is that it would effectively impose VAT on the sales of micro-businesses and hobby sellers who currently operate lawfully below the VAT threshold. These low-turnover traders can sell VAT-free today, making their businesses viable despite low margins.

Under Amazon’s proposal, this advantage disappears. If a product currently sells for £10, a marketplace operating as the Deemed Supplier must extract VAT and treat the item as £8.33 net, regardless of the seller’s VAT status. This single change wipes out margin for many small traders, who already face tight fee structures and fulfilment costs.

Although the VAT threshold would still exist in law, it becomes hollow for marketplace sellers. In practical terms, the reform would abolish the threshold for anyone selling through a marketplace, pulling thousands of micro-enterprises into an economic position equivalent to VAT registration but without the ability to recover input tax. Many would simply close or exit marketplaces.

2. Pricing impact: an inflationary effect

Even VAT-registered domestic sellers would feel upward pricing pressure. When a marketplace becomes the VAT obligor, it must enforce strict VAT-inclusive pricing to avoid under-collection. Sellers who suddenly receive only VAT-exclusive amounts may attempt to raise their listing prices to preserve margin. At the same time, marketplaces will rebuild fee structures to recover the cost of new compliance systems, VAT liability risk, and rate management.

The combined effect is an inflationary shift in consumer prices across a broad set of goods. Given the UK’s sensitivity to inflation, policymakers must recognise the real risk of price rises associated with expanding the Deemed Supplier regime.

3. Channel distortion: marketplace vs direct sales

A further complication arises from the interaction between marketplace and direct-to-consumer channels. A seller under the VAT threshold would continue to make VAT-free supplies on their own website, but their marketplace sales would become VAT-taxed via the platform. This creates a two-tier pricing system that incentivises sellers to leave marketplaces and shift to direct channels such as Shopify, WooCommerce and social commerce.

This migration undermines the central advantage of the Deemed Supplier model: HMRC’s ability to rely on large, well-regulated platforms as VAT intermediaries. If sellers retreat from marketplaces, the projected VAT revenue gains may not be achieved.

4. Administrative complexity simply relocates

Amazon argues that the reform would simplify VAT obligations for sellers, but this is only partially true. Complexity does not disappear; it simply moves. Sellers operating on multiple channels will face dual VAT environments—VAT-inclusive marketplace sales and VAT-free or VAT-accounted direct sales—creating bookkeeping and pricing challenges that did not previously exist.

For marketplaces, becoming the Deemed Supplier for all domestic sales introduces new layers of complexity in VAT rate determination, tax-point management, multi-component pricing, voucher handling and promotional adjustments. These challenges are manageable but expensive, and marketplaces will pass costs to sellers or consumers.

5 Market structure consequences

Extending the Deemed Supplier regime risks strengthening the dominance of established global platforms. Large marketplaces have the resources to absorb the substantial compliance and systems build required, but smaller and specialist platforms may be less able to do so. This risks entrenching existing market power and reducing competition in the UK digital retail environment.

Many micro-sellers supply categories—handmade products, vintage items, niche accessories—that are not easily replicated by larger vendors. Their exit would reduce consumer choice and decrease the diversity of the UK e-commerce sector.

6. Flat rate and margin schemes clash

Businesses currently using the VAT flat rate scheme or second-hand margin scheme would also face additional complications. Under Amazon’s proposal, marketplaces would charge and remit VAT on marketplace sales at the standard rates as though the underlying supplies were fully taxable in the normal way. The trader would then be expected to “true up” its liability in its own VAT return, re-applying the relevant flat-rate percentage or margin rules to determine the correct VAT ultimately due. This introduces yet another reconciliation step and increases the risk of error where special schemes are involved.

7. Risk of more UK marketplace sellers becoming net repayment traders

If a UK business is VAT-registered but routes most or all of its B2C sales through marketplaces, the platform – not the seller – would account for the output tax. The seller would still have to submit VAT returns in order to recover input tax from HMRC, but with little or no output tax to offset this against, many would move into regular repayment status. Amazon’s modelling indicates that the number of repayment traders across the economy could rise by around 12%, with the overall value of repayments increasing by roughly 6%. That implies more businesses facing tighter cashflow, even if some of the impact could be softened by moving to monthly repayment returns – which itself adds compliance overhead and still leaves an average cashflow cost in the region of £1.35 per £1,000 of VAT collected.

8. Dual compliance for omni-channel sellers

The position is even more complex for businesses that sell both via marketplaces and directly through their own webshops or other channels. In practice, they would have to operate a split VAT compliance model: traditional VAT accounting for their direct sales and a separate process for sales where the marketplace is the deemed supplier. Ensuring that both streams are correctly captured, reconciled and reported would add an extra layer of systems configuration, bookkeeping and audit trail requirements.

These are genuine design challenges, not reasons to dismiss the concept altogether. They underline the need for detailed policy design, transitional measures and consultation with affected sectors. With the right safeguards, they should be manageable issues to solve rather than barriers to serious consideration of the deemed supplier model.