VAT: It’s complicated.
Europe’s version of sales tax, VAT (Value-Added Tax), is a major obstacle for Amazon sellers looking to expand their business overseas. If you want to learn more about the basics of VAT, and how to deal with it as a US-based Amazon seller, you can check out our article on how VAT works.
However, just because VAT is complicated, doesn’t mean you shouldn’t pay it if you're selling in Europe. After all, tax fraud is tax fraud. Unfortunately, many online retailers have taken the darker path: not registering for VAT at all, but still selling in European markets at the low, low prices that come from not charging any taxes.
For the longest time, HMRC (Her Majesty’s Revenue and Customs, the British revenue agency) knew they were losing money, but couldn’t easily take direct action against the offending retailers. Since they were selling through Amazon, it was up to Amazon to kick them off the marketplace; however, Amazon, to put it bluntly, didn’t care all that much.
As a result, the Exchequer, UK sellers, and VAT-compliant overseas sellers alike were all suffering. Because the VAT rate in the UK is 20%, non-compliant merchants could simply price their items 20% lower than compliant competitors. According to David Gauke, a member of the UK parliament, VAT fraud accounted for £1–1.5bn of the total VAT gap in March 2016, which would translate to around £7.5bn in lost sales revenue for compliant merchants.
Fortunately, some good news did come out of this saga. Interest groups such as vatfraud.org and RAVAS (Retailers Against VAT Abuse Schemes) pressured the government into taking this issue seriously, and the result was a series of laws introduced in March 2016.
New UK VAT Laws: How They Work
Basically, the new laws allow HMRC to hold online marketplaces liable for unpaid VAT. More specifically, If HMRC identifies an online retailer who is committing VAT fraud, they will instruct them to do one or all of the following:
- Register for VAT in the UK.
- Appoint a UK-established VAT representative.
- Provide a financial guarantee to HMRC.
If the retailer does not comply with these, the marketplace hosting them will be notified. That marketplace then has a designated amount of time (usually thirty days) to avoid becoming liable for the unpaid VAT, either by securing the owed VAT from the retailer or by removing the retailer’s selling privileges. If no such action has been taken after the time period has passed, the marketplace is held liable for the VAT.
What Came Next
These laws certainly seemed to provide a good amount of executive power to HMRC — certainly, it’s more power than they had before. In fact, HMRC put out a press release in December 2016 detailing the changes they saw after the laws were passed. They saw a tenfold increase in VAT registrations from 2015 to 2016: 7,185 internet retailers registered in 2016, compared to just 695 in 2015.
While this seems like good news, other groups aren’t so sure.
One of the groups spearheading the anti-VAT-evasion campaign, vatfraud.org, calls HMRC’s press release a “PR stunt” that doesn’t actually prove whether the previous VAT offenders have corrected their ways. They say that HMRC still has to answer how much undeclared VAT they have recovered from these previously unregistered sellers, and whether the newly registered sellers are even paying VAT.
The vatfraud.org campaign interprets the huge increase in registrations in 2016 as evidence that all of those sellers were previously committing VAT fraud, and are now having registrations handed to them while still refusing to pay VAT. While we don’t think that every one of the 7,000 registrations was committing fraud — it is possible that a good number of these registrations came from Amazon’s campaign to increase VAT awareness and accessibility — it is certainly a concerning number when you think about the scale of the increase. Plus, as vatfraud.org points out, it’s naïve to assume that all of these sellers, once VAT registered, will begin to follow all regulations to a T.
Furthermore, it shouldn’t be too hard to figure out which sellers aren’t paying their taxes. If you look at a seller’s prices and ask yourself how they could possibly be making any money while still paying VAT, the answer is: they probably aren’t paying VAT. Vatfraud.org has reported hundreds of suspected VAT fraudsters and so far, HMRC has taken limited legal action against these sellers. We’ll see if HMRC steps up their policing, or if the status quo stays roughly the same.
On Amazon’s end, the online marketplace conveniently launched a new VAT Resources page in December that answers questions sellers may have about VAT and helps them through the registration and filing processes. They include a VAT litmus test that tells you whether you need to register for VAT or not, and offer a discounted rates program to “reduce the cost and complexity of becoming VAT compliant.” This could be seen as Amazon engaging in a bit of CYA now that they can be held liable for unpaid VAT, or it could simply be a coincidence related to the introduction of the Pan-European FBA program in September.
It’s unfortunate that HMRC and Amazon moved so slowly on the issue of VAT fraud, because the anti-competitive atmosphere of tax evasion hugely depresses sales for UK sellers and compliant foreign sellers alike. However, HMRC didn’t have the resources or the powers to regulate online marketplaces before March 2016, and Amazon didn’t have the strongest motivation to get involved — after all, they were making money off of fraudsters and legitimate retailers alike.
Despite the passage of these new laws, the problem is far from solved. We’ll see if the continued efforts of interest groups and government powers make the European markets a friendlier place for legitimate sellers, or if we’ll see the same sorts of tax evasion that we’ve been seeing for the past 10 years.