HMRC is proposing new measures to combat VAT fraud by overseas businesses selling online into the UK. What is it thinking?
When goods are in the UK at the point of sale, overseas sellers are required to register for VAT in the UK – regardless of the overall level of sales. In these circumstances the seller must charge and collect VAT. Many overseas businesses are not VAT registered, or if they are they are not always collecting the appropriate amount of tax. Furthermore, some overseas online traders are charging UK VAT but failing to declare it.
HMRC is now proposing that when the buyer uses a credit or debit card to pay an online retailer, the payment should be split into the VAT element and the net amount – with the VAT deposited directly with the tax authority.
HMRC has published a call for evidence on the case for a new collection mechanism for online sales. This would utilise technology to allow VAT to be extracted directly by HMRC from online transactions at the point of purchase. This is known as a split payment model.
This would apply to all online traders, including UK businesses, so some will incur VAT on their own purchases.
Since you would not receive the output VAT on your own supplies, the split payment model could create a cash flow problem, given that you would not be able to recover your own input tax credits due from HMRC until the submission of your VAT return.
It might be possible to offset the effect of this by switching to a scheme that offers cash-flow advantages, e.g. the cash accounting scheme, if the business also makes sales and purchases offline.
HMRC wants to deduct VAT from online card transactions directly at the point of sale. This might cause cash-flow issues, so consider if switching to schemes which offer cash-flow advantages for offline sales is worthwhile.