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UK VAT split payments foreign e-commerce fraud pilot

HMRC launches e-commerce VAT split payments project to tackle seller fraud

HMRC have initiated an 18-month proof-of-concept (POC) project to evaluate the feasibility of e-commerce transaction real-time direct VAT payments. The focus is on sales of e-commerce goods and services by non-resident merchants, and to eliminate any non-compliance and fraud. This is being done in cooperation with Payment Service Providers (PSPs) such as credit cards, online payment services and e-wallets.

The project will focus on “when qualifying goods or services are bought, the VAT within the purchaser’s payment could be routed to HMRC and the seller only receives the net amount”. This would mean consumer payments being split between the gross amount and VAT, with the latter being remitted directly to HMRC.

The project will focus on working with PSPs, using their existing messaging services. The POC will seek to understand the interoperability of the existing payments and VAT systems – without excessive interference or slowing down of the payments. Or, HMRC is willing to look at other routs, including product codes or e-invoicing.

There will be three phases:

  1. establish if existing payment systems can identify properly in-scope transactions
  2. determine if a seller is VAT compliant from payment data
  3. establish what technology solution could deterine the correct VAT prior to transmission out of the UK.

Nov 2022: HRMC issues RFI for development of withholding VAT on non-resident sellers

UK’s HMRC have issued a RFI seeking views on the outline requirements and proposed procurement process for the development of a proof of concept for the real-time extraction of VAT from payments. The aim would be to have payment service providers identify and split the VAT element of payments by consumers to primarily non-resident sellers or facilitating marketplaces of goods.

This is in advance of an envisaged tender launch in January 2023.

The UK government had recommitted at the start of this year to exploring VAT split payments by payment service providers on ecommerce trade between UK consumers and non-resident sellers. This came in the  Treasury Command Paper on tax administration and maintenance. Many challenges remain, including how credit card acquirers would be able to correctly identify the right VAT amount, or handle refunds. Additionally such a unilateral measure could impact on the competitiveness of the UK payments industry as merchants could switch to foreign providers.

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VAT split payments to by-pass traditional return

Split payments is an anti-evasion measure which requires the payment of the VAT element of a transaction directly to the tax authorities instead of to the vendor – who would of otherwise then remitted the tax with their regular VAT return. By intercepting VAT through intermediaries – such as payment providers –  in the payment cycle, split payment potentially offers a powerful, channel-agnostic means of enforcing VAT compliance on sellers who are outside the UK’s jurisdiction.

It is used in Poland for B2B payments on fraud risk products. But it is most popular on e-commerce in South America. There are a number of models

  • Optional VAT registration by foreign sellers / marketplaces, plus a Withholding VAT for payment providers for the rest. The tax authorities then publish regular lists of foreign sellers either:
    • ‘Negative list’ of those not VAT registered so payment providers know they should deduct VAT from payments to them. The challenge is for the tax authorities to identify the non-compliant who often don’t want to be found or are small to detect. e.g. Colombia
    • ‘Positive list’ of those non-residents VAT registered and so no Withholding VAT should be taken by the payment provider. e.g. Mexico
    • Withholding agents, applied in Argentina, where provincial government nominate payment providers and others to apply varying withholding VAT rates, including a 2% Turnover Tax.
    • Supplier VAT bank accounts, used in Poland and in a number of South American states, including Peru (Sistema de Pago de Obligaciones Tributarias (SPOT). Suppliers must open special VAT receipts bank accounts where their customers pay the VAT element of an invoice. This account has restricted uses to settle VAT return liabilities.
    • Buyer liability, used in Chile, whereby the obligation to calculate and remit the VAT is switched from the seller to the buyer – known as subject of change. This may include self invoicing for the supply and VAT reporting. This is only applied where the Internal Tax Service has identified the buyer as a withholding agent.
  • Withholding VAT only. e.g. Paraguay which also has a new 4.5% Digital Services Tax.

Since 2018, the UK government has been considering how to deploy this with payment providers in an Industry Working Group. The focus is on tackling VAT fraud by non-resident e-commerce sellers. This would add to measures already taken in the UK around the January 2021 e-commerce reforms, marketplace compliance and fulfilment house due diligence requirements. The UK is also looking at marketplace disclosure reforms, along the lines of the EU’s DAC 7 harmonised platform reporting.

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