Online sellers scramble as £1bn VAT loophole closes

Thousands of overseas online retailers are rushing to register for VAT as the UK government closes a tax loophole costing the Treasury £1 billion each year.

The new rules aim to create a level playing field in the online retailing arena. Picture: Ian Georgeson

HM Revenue & Customs (HMRC) has seen 7,185 internet retailers register for VAT since new rules were introduced in September, forcing overseas companies to pay the tax or risk being blocked from trading in the UK. That marks a ten-fold increase from the 695 companies that registered for VAT last year.

The Treasury said that overseas sellers have had an unfair advantage over domestic retailers by not charging VAT on goods sold online, a practice which has cost the government about £1bn a year.

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“With a growing number of overseas sellers dominating sales of popular gifts on online marketplaces, last Christmas alone it was estimated the Exchequer lost tens of millions of pounds to VAT evasion,” the Treasury said.

UK-based warehouses for those overseas retailers will also be forced to join a “due diligence” scheme by 2018 or face penalties.

Together, the new VAT powers and warehouse scheme are expected to raise £875 million by 2021, the Treasury said.

Treasury financial secretary Jane Ellison said: “Having worked in the retail sector, I know what an important time of year this is for retailers and the millions of workers across the country who work in the sector.

“These new powers will mean that everyone has to play by the same rules and pay the right tax.”