VAT invoicing: split payments

In 2018, HMRC published a consultation on the possible use of "split payments" to collect VAT efficiently through the payment process and reduce VAT loss resulting from online, cross-border VAT fraud. It is now reported that HMRC are moving forwards with a proof of concept proposal to test the feasibility of introducing such a process in the UK.

The rapid expansion of the online shopping market over recent years has brought challenges for the tax system, in particular for VAT, which can lead to tax losses from cross-border online sales. This happens when consumers buy goods from outside their jurisdiction from sellers who, through fraud or ignorance, do not comply with their tax obligations. As a result, HMRC launched a consultation in 2018 on the possible use of VAT split payments. By intercepting VAT through intermediaries in the payment cycle, split payment potentially offers a means of enforcing VAT compliance.

Five years later and it is reported that HMRC have published a proof of concept project to evaluate the possibility of using split payments to collect VAT directly. The idea is that a payment might be split into elements which are then routed to different destinations. In a VAT context that is the idea that 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.

The initial focus is on exploring the feasibility of splitting payments in this specific area of VAT - for goods and services bought by UK consumers from non-compliant overseas sellers. This will test a range of capabilities including the technology's ability to know when VAT is chargeable or not. Also, whether an intervention can be made without the consent of the seller or buyer. The proof of concept is intended to cover both card and non-card payments (eg BACS, payment wallets etc).

HMRC's current emphasis is only to discover whether technology is capable of real-time payment interventions to tackle overseas VAT non-compliance. This will then inform policy developments. Such a mechanism would be driven by either payments system messages (e.g. the location of a seller or a buyer) or new data sources (e.g. product codes, e-invoices or equivalent).

HMRC are seeking to complete the proof of concept by 31 July 2024 if possible.