VAT evasion and internet retailers

Nick Herbert (Arundel and South Downs) (Con): Thank you very much for calling me, Mr Hanson. It is a pleasure to follow my hon. Friend the Member for Daventry (Chris Heaton-Harris). I congratulate him on securing the debate and on the excellent way in which he explained the problem. He gave a thorough introduction, so there is little need for me to repeat his explanation of how this fraud is happening.

My interest in the topic dates from last year, when my constituent, Mr Neven Juretic, came to see me at one of my surgeries to explain what had happened to his business. I believe the Minister has met Mr Juretic—I am sure he will tell us more about that—who in 2010 set up an online retail business that grew very fast. He had a turnover of several hundred thousand pounds and employed quite a few people locally. It was all going well for the business, which was one of the top five sellers in its market on eBay, when suddenly, in 2014, it underwent a catastrophic loss of revenue, such that sales are now only about 5% of their previous level. That forced him to lay off a large number of his staff. He lost significant assets and now fears that his business faces bankruptcy.

Mr Juretic wondered what had suddenly caused the sharp loss of sales. He became aware that it was not because his competitors were selling better goods at better prices by running more efficiently and doing a better job than him, but because they were able to undercut his prices by about 20%. When he further researched the matter, he found that they were able to do that because, as my hon. Friend set out, they were evading VAT on their sales, which placed him at an immediate disadvantage. He teamed up with other retailers in the same position, and they have done an enormous amount of work. He set up vatfraud.org, to which my hon. Friend referred, which details the scale of the problem and sets out their concerns about the relative inaction in dealing with it.

There seem to be three sets of losers. First, there has been a change in retail practice as ordinary high streets have been affected by the growth of online marketing. The global trend is that people increasingly prefer to buy from online retailers. There is nothing wrong with that, but it has had an impact on our high streets. That is fine, provided that those online retailers sell fairly.

Secondly, there has been an impact on online retailers themselves, and small businesses are going under. Those small retail businesses were at least contributing to the economy and substituting for the high street businesses that were affected by the change in the way the market operates. The change is in consumers’ interest, no doubt, but those small businesses, such as the one in my constituency, were growing and employing local people, resulting in a change in employment patterns. They were successful UK businesses, and they are being clobbered.

Thirdly, there is a potentially significant loss of revenue to the Exchequer. I am sure the Minister will be the first to tell us that he wants to ensure that more revenue flows to the Exchequer, and that he wants to prevent a haemorrhaging of funds at a time when resources are in short supply. The fraud we are discussing has multiple effects, and it appears to be taking place on a substantial scale that justifies more effective action to tackle it.

Mr Juretic and his colleagues say that they have made some progress with trading standards, which is willing to investigate the issue, but they say that there has been inadequate co-operation between trading standards and Her Majesty’s Revenue and Customs. Their complaint is that they do not think HMRC is addressing the issue sufficiently seriously. As my hon. Friend said, if it is possible to do research oneself and identify companies that are not properly VAT-registered, yet are selling stock that is clearly warehoused in the UK. That is the essence of the fraud. Mr Juretic and his colleagues identified 500 such companies—why is it not possible for agencies to go after those people? I ask the Minister in the spirit of openness, why has that not happened? It is clearly in the interest of the Exchequer and our national interest to ensure that businesses are not defrauded. Why is it not possible to go after those companies? After all, there is an audit trail, so it should be possible to identify companies that are not properly VAT-registered. They are meant to have a number, so they should be susceptible to that kind of compliance.

The situation is infuriating not only to the businesses that are affected but to the literally millions of law-abiding, tax-paying, VAT-paying small businesses that regularly find themselves at the sharp end of the tough VAT enforcement that we have in this country. HMRC never treats small businesses with kid gloves when it comes to paying their VAT. The hard workers, the strivers and those who employ a lot of people all pay their VAT and are absolutely slammed if they do not, so when they see that overseas companies are able to commit this kind of fraud, they get very angry about it. I feel angry on behalf of my constituent, given what happened to him.

Can there not be a more effective compliance mechanism? Is there a reason why it is so difficult? Perhaps there is, but it is important to communicate that to Mr Juretic and his colleagues, because at the moment they feel that there is just inertia. They have had a lot of meetings with HMRC and others, but they do not feel that they are getting anywhere. Their suggestion, which we should consider seriously, is that we should set up a special unit to focus on online retail businesses, given that that new sector is a huge growth area. It would be able to demand VAT numbers and pursue non-compliant companies.

What is the proper responsibility of the fulfilment houses? My hon. Friend the Member for Daventry was not willing to let them off the hook. At the moment, companies such as Amazon and eBay say, “We don’t have responsibility for this. If you bring us evidence that there are companies that have evaded VAT, of course we will take them off our websites and won’t allow them to advertise, but it’s not our job to police them.” I think that raises a big public policy question. Given that those businesses, which are often international businesses, make large sums of money that do not find their way to the Exchequer as tax revenue, what responsibility do they have to ensure that people who sell in their marketplaces are selling properly? At the very least they should comply with efforts to track down companies that appear to be defrauding the Exchequer and the taxpayer, but perhaps they have a bigger responsibility to undertake proper checks themselves.

How hard would it be to insist that those companies require businesses to have a verified VAT number before they are allowed to advertise? It should not be hard. Amazon, eBay or anyone else could make a simple request. If somebody who is clearly a business rather than an individual—in the case of eBay, they come through that side of the website—wants to advertise, they should have to provide a VAT number, which is checked, and they should be allowed to advertise only when it is found to be valid.

If HMRC were to make a concerted effort and the authorities were to go after those companies, it would be possible to tighten up compliance quickly. At the moment, my constituent and his colleagues feel that a concerted effort is not being made, that the authorities are not co-operating sufficiently with each other and that the fulfilment houses are passing the buck by saying, “We don’t have any responsibility for this.”

We need to take the issue seriously, for the reasons I have set out. If there are real obstacles, of course I will listen to the Minister and relay his comments to my constituents. They have asked perfectly fair questions, as I am sure they did when they met him. If we do not take tougher action on this issue, it will be a growing scandal and an embarrassment to HMRC and the Government. It is in the interests of all of us to clamp down on it, and I hope the Minister will tell us that he plans to do that.

The Financial Secretary to the Treasury (Mr David Gauke): It is a great pleasure to serve under your chairmanship for the first time, Mr Hanson. It was not that long ago that you and I were debating tax matters in your long and distinguished period on the Labour Front Bench, as my shadow. I note that four of the five shadows I had in the previous Parliament are no longer serving on the Labour Front Bench. I hope the hon. Member for Wolverhampton South West (Rob Marris) will not see that as in any way ominous.

Rob Marris: I see Mr Hanson has had a promotion, so he should be congratulated.

Mr David Hanson (in the Chair): With due respect, I have had a release after 17 and a half years.

Mr Gauke: Yes, that is a very long sentence. I hope you are enjoying your new role, Mr Hanson.

I congratulate my hon. Friend the Member for Daventry (Chris Heaton-Harris) on securing this debate and setting out the case so well. I also congratulate my right hon. Friend the Member for Arundel and South Downs (Nick Herbert) on his passionate speech. He is correct to say that I have met Mr Juretic and listened carefully to the points he raised.

I will turn to specific points, but first I want to acknowledge the important work that Her Majesty’s Revenue and Customs is doing in collaboration with other agencies, both in the UK and internationally, to tackle tax evasion, which, as the hon. Member for Wolverhampton South West pointed out, is what we are talking about today. Tackling tax evasion in all its forms is a priority for HMRC. Last year, HMRC collected and protected a record £26 billion in revenues from compliance activities and secured more than 1,200 prosecutions using intelligence, sophisticated risking systems and smart data.

The phenomenal growth in online sales in recent years, which we have heard about this afternoon, has made many people’s day-to-day lives much easier but presents significant challenges for HMRC. That is because the supply chains are often very complex and involve a number of different entities. Suppliers can be located overseas and their records are not always available alongside the goods. All those factors combined make it much more difficult to spot where tax and duty have been paid.

To make things more complicated, HMRC is looking for frauds taking place in the midst of large volumes of legitimate trade. It is far from our, or HMRC’s, intentions to get in the way of legitimate trade, so HMRC is mindful of the need to target its activities proportionately. Nevertheless, this is a significant issue that we are determined to tackle. Building on its expertise in tackling evasion, HMRC has brought together specialists from across the Department and established in spring last year a taskforce to tackle the specific customs and VAT frauds that we have been talking about. That taskforce currently has more than 75 live investigations open into businesses or entities suspected of flouting the rules, and that figure is expected to grow to 150 before the end of the 2015-16 financial year.

Retailers Against VAT Abuse Schemes has highlighted about 500 businesses that it alleges are complicit in these frauds in some way. My hon. Friend the Member for Daventry drew attention to that list, and other hon. Members have referred to it. I assure the House that HMRC has examined the RAVAS list closely. For reasons of taxpayer confidentiality, I am not in a position to know, let alone say, what conclusions HMRC has reached in respect of each of the companies listed by RAVAS. However, it would only be fair for me to say that one cannot assume every company on the list is non-compliant.

At this point, I should touch on VAT registration numbers, which a number of hon. Members raised, including the hon. Member for Ross, Skye and Lochaber (Ian Blackford). Not all sellers are required to be VAT-registered. Overseas sellers that supply goods, located outside the UK, have no requirement to be registered for UK VAT. If they are compliant, in those circumstances, they would pay import VAT at the border. Of course, that would be a sticking tax, as they would not be entitled to reclaim that VAT. There are complications in this area, and the absence of a VAT number does not, in itself, suggest that a seller is breaking VAT law.

The issue is if sellers are claiming to be outside the UK and selling from outside it, but are in fact storing goods in a warehouse in the UK and dispatching them from the UK to a customer here. That changes the circumstances, but I want to be clear that the absence of a VAT number does not necessarily mean that fraudulent activity is occurring.

HMRC is working jointly with other Government agencies, including carrying out joint visits with trading standards and sharing intelligence with UK Border Force, to address risks across the entire supply chain to ensure that all sellers who sell online pay all the taxes that are due. To give hon. Members a flavour of that work, in an operation just before Christmas, HMRC and trading standards seized goods worth half a million pounds. As HMRC’s programme of activity continues, and both its operational intelligence and understanding of fraud improve, it expects to make more interceptions and seizures of illicit goods.

I should stress the point about illegitimate and legitimate trade. HMRC has the powers to seize or detain all goods in a warehouse, for example, but it also has to think about the potential impact of its actions, for instance, on the end consumer. If HMRC were seizing goods that subsequently turned out to be there legitimately, I suspect many of our constituents would want to raise concerns.

We recognise the concerns that have been raised by compliant businesses. Clearly, it is very important that non-compliant businesses should not be allowed to establish any unfair advantage over compliant businesses, as that would distort competitiveness. Again, that point was rightly made by a number of hon. Members. Tackling these frauds is just as much about maintaining a level playing field for business as it is about collecting the tax and duty that should be paid.

That operational work is the first strand of HMRC’s work to tackle these frauds. The second strand is engagement with the online platforms on which goods are sold.

Rob Marris: Before the Minister moves off the first strand—perhaps he is planning to address this point later—23 months ago he talked about the investigations that were going on. He tells us today that there are 75 live investigations. What he could tell us, which would not breach taxpayer confidentiality, is whether there have been any prosecutions—which would be in the public domain—in the last five years for this sort of fraud.

Mr Gauke: I will have to write to the hon. Gentleman with details on that. I am not in a position to give any numbers this afternoon, but I understand his point.

Turning to online platforms, I can tell hon. Members that a meeting with the top online platforms took place recently, at a very senior level, to explore the role that they can play in preventing such frauds. HMRC is proactively following that up to see how it can work with the platforms to tackle the fraud and better quantify the scale of that. However, having looked at the matter, HMRC’s view is that online platforms have no liability for unpaid VAT where the operator merely provides a marketplace for businesses to sell goods.

I know that this point was raised by my hon. Friend the Member for Daventry, and although I am loth to get too much into a legal argument, he mentioned the Kittel case. It is worth bearing in mind that the Kittel case applied in the context of MTIC—missing trader intra-Community—fraud, or carousel fraud, which the hon. Member for Wolverhampton South West and I debated some years ago. Irrespective of that issue, it is worth pointing out that the Kittel case has been used by HMRC in the context of withholding repayments of input tax to members of a supply chain. It is a civil case, not a criminal case, and in HMRC’s view, the important difference here is that all members of a supply chain in MTIC fraud have, at some point or other, title of the goods, enabling them to reclaim input tax. That is not the case when an online platform is involved in providing services relating to the sale. Therefore, HMRC does not believe that Kittel applies in these circumstances in the way that my hon. Friend suggests.

It is also worth pointing out that there are many parties involved in a transaction where this type of fraud may occur—for example, fulfilment houses, payment providers, freight forwarders and agents, and online marketplaces as well as online sellers. HMRC is not limiting anti-fraud work to marketplaces only, although it recognises that they play an important role and is prioritising its engagement with them in the coming weeks.

The third and final strand to tackling this issue is putting together an effective set of policies that can make this sort of fraud harder to perpetuate in the first place. As hon. Members will recognise, unilateral action is not going to solve the problem by itself, as there is an important international dimension to these frauds. They affect the revenues of other EU member states as well as the United Kingdom, and we are in close dialogue with them about how best to combine our efforts to tackle such frauds.

Rob Marris: Welcome to the Chair, Mr Davies. Would the Minister therefore say that in this respect, it would be advantageous to the United Kingdom to remain a member state of the European Union, because of that international dimension and the international action to which he referred?

Mr Gauke: I do not know whether that intervention was for my benefit or for the arrival of our new Chairman —Mr Davies, it is a great pleasure to see you in the Chair this afternoon.

The point I would make is that whether we are inside or outside the European Union, international co-operation is very much necessary in such cases. As an example of that, the customs aspects of these frauds—it needs to be emphasised that this is a customs as well as a VAT issue—are on the agenda for the meeting of the directors general of all EU customs services on 26 March. There is some evidence that the UK has been particularly targeted for these frauds because of our much greater take-up of online shopping. That will make it all the more important that we work closely with our international counterparts, for the benefit of the UK and more widely. HMRC already works closely with the European Commission and OLAF, the EU’s anti-fraud unit.

Of course, there is a lot more to be done, not least as online retailing gets ever more popular worldwide. All taxes are kept under review, and HMRC is considering whether there need to be policy changes or other changes to the rules that apply to online sales. However, for effective longer-term solutions, we will need to continue our engagement with other EU member states, the Commission and the OECD, and I would like to assure hon. Members that that dialogue is already under way.

Our goal is simple: one where the customer continues to enjoy the benefits of being able to buy goods conveniently through an online platform, but where unscrupulous businesses cannot undermine, through fraudulent activity, businesses that do the right thing. Although there is still much work to be done, I hope that hon. Members will appreciate the strong and collaborative efforts that HMRC is making to tackle this issue.

For full debate see: http://tinyurl.com/jmt6wl4