Extending VAT online marketplace rules to UK sellers

The government has published a consultation on extending the scope of the rules requiring online marketplaces to account for VAT on sales made by their users to combat continuing VAT evasion and avoidance in connection with the use of such platforms. In particular, the government is considering extending the online marketplace’s requirement to account for VAT to UK based businesses as well as overseas businesses.

The consultation notes that combatting online VAT non-compliance will also help to support the high streets, whose businesses are frequently outcompeted by non-compliant online sellers. Indeed, to help support this object, the government is committing that “any revenue raised from these reforms will be ploughed into improvements for the business rates system for pubs, restaurants, hotels and other businesses on the high street”.

Background

The UK introduced rules in 2021 to make online marketplaces (OMPs) liable to account for VAT on some sales made via their platforms. In particular, as a result of non-compliance, the government required online marketplaces in the UK to remit VAT on behalf of their overseas sellers. This reflected both the rapid growth and increasing structural importance of online commerce, and widespread avoidance of VAT by overseas sellers whose lack of UK establishment limited HMRC’s ability to enforce tax obligations.

Whilst that policy is regarded by the government as successful, the consultation notes that non-compliance still subsists among sellers based both overseas and domestic sellers. In particular, the consultation notes that VAT evasion via OMPs continues in the form of overseas sellers masquerading as domestic businesses, UK businesses spreading sales across a number of OMPs to appear below the registration threshold and businesses which essentially engage in missing trader fraud. The consultation notes that the prevalence of VAT non-compliance in the delivered hot food sector is a particular and ongoing issue.

Policy proposal

In order to combat this non-compliance, the government now proposes to extend the obligations of OMPs to account for VAT to goods sold by UK businesses on their platform, as well as overseas sellers. The consultation puts forward two main forms of the proposal: applying the policy only to UK businesses with sales above a certain level; or making a VAT rate relief available to UK businesses below the registration threshold.

There is no suggestion in the consultation that the scope of the definition of OMPs would change as part of the proposal.

Extending the liability rules

The proposal is to extend the existing obligation on OMPs to account for VAT on sales of goods by overseas sellers to non-business consumers to sales by UK businesses to non-UK consumers. Where a sale is made via an OMP which is subject to these rules, then the deemed sale by the UK seller to the platform would be treated as a zero-rated supply. It would not apply to B2B sales. However, the consultation states that it is the government’s intention to combat non-compliance while minimising the impact on non-VAT registered businesses.

A minimum platform threshold (MPT) could be used to limit its scope to sales by UK businesses with total sales above a specified value per platform. However, the consultation makes it clear that this would not replace or remove the general obligation on businesses to register for UK VAT based on the VAT registration threshold, where, for example, the seller has other sales outlets.

The MPT could be used to carve out businesses not required to register for VAT. Accordingly, the “lead proposal” is an MPT set at £90,000, which would bring into scope of the expanded rules only UK businesses with total sales on individual platforms which exceed the value of the VAT registration threshold. The consultation notes that there is, however, a significant amount of VAT non-compliance that will not be tackled by an MPT set at £90,000. For example, businesses could disaggregate their sales across multiple accounts on the same platform in an attempt to avoid the rules. The government is therefore also seeking views on the use of a lower MPT which would make it more challenging for non-compliant businesses to avoid their VAT liability. UK businesses below the VAT registration threshold whose sales become VATable as a result of a lower MDT might choose to voluntarily register for VAT to ensure that they recover associated input VAT.

The alternative suggestion to restrict the impact on non-VAT registered businesses is some form of (unspecified) VAT rate relief. The consultation recognises that not all small businesses operating below the VAT threshold would wish to voluntarily register for VAT

Exclusions

Sales made by those not in business, such as individuals selling second-hand goods, will not be in scope of the rules and will not be affected. The government is also considering how the policy could apply to sales of second-hand goods by UK businesses. Such sales are currently subject to VAT only on the margin realised on the sale, which results in a much lower level of VAT than VAT on the full selling price. Therefore, the government is considering excluding second hand goods sold by a business from the rules or not allowing businesses on OMPs to take advantage of the second-hand goods scheme.

Administration

The consultation recognises that the new policy may bring additional OMPs into the scope of these rules and will certainly require additional due diligence by affected OMPs. In particular, checks required by the policy would most likely include:

• where a business operating on the OMP is established
• the turnover of a business operating on an OMP
• whether a sale is made in the furtherance of business
• whether the goods being sold are second-hand or new.

For UK businesses already operating via OMPs, the consultation recognises that no longer accounting for VAT on sales may have a adverse cashflow impact as the VAT they would normally hold before accounting it to HMRC will now be collected by the marketplaces. The government is keen to understand the extent of this impact for businesses.

The VAT Flat Rate Scheme (FRS) allows businesses trading under £150,000 to account for a reduced rate of VAT on sales but not claim any input VAT. The extension of the OMP rules could have implications for businesses trading on OMPs using the FRS. The government is interested in the views of businesses who could be impacted.

Comments

The consultation runs until 18 August 2026 and responses should be sent to consultationonlinemarketplaceliability@hmrc.gov.uk or submitted via HMRC’s online form.