HMRC have published a new consultation, ‘Alternative method of VAT collection – split payment’, which looks at who is best placed in the online marketplace supply chain to account for VAT to HMRC, in order to combat VAT fraud.

A number of businesses that sell goods online to UK customers are not accounting for VAT.

In response, HMRC introduced the Joint and several liability rules to hold the online marketplace responsible for ensuring VAT is paid.

The UK have now opened a new consultation on the use of payments industry technology to collect VAT on online sales and pay it directly to HMRC.

This consultation follows an earlier Call for evidence and sets out how the mechanism could work, how it can be enforced and what the options are for collecting the VAT.

Accounting for VAT:

  • The government believe that the Merchant Acquirer will be best placed to deal with the split of VAT from gross income.
  • HMRC would look to provide a list of fit and proper acquirers who are known to comply with the rules. Those wanting to do business in the UK could apply to be put on the register.
  • Every time a card issuer receives a payment authorisation request, it will check if the acquirer is on the approved list.
    1. If on the list, the card issuer will release the full payment for the transaction and the acquirer would split it between VAT and net, and pay the VAT direct to HMRC. This payment may be periodic, perhaps daily.
    2. If it is not on the list, the card issuer will be responsible for making the split and VAT payment direct to HMRC.
    3. The balance of the transaction payment after deduction of VAT would be paid to the merchant.
  • HMRC will credit the merchant’s VAT account with the amount received.

Amount of VAT:

HMRC have presented three options. HMRC’s preferred choice is option 3:

    1. Split all transactions as if they are standard rated to make calculating the amount of VAT to be split more simple.
      • 20% VAT will effectively be paid by all merchants on all relevant sales.
      • When the VAT return is submitted the correct VAT on the goods is declared and the amount due to HMRC is then adjusted accordingly.
    2. Mandatory Flat rate scheme for overseas sellers.
      • This would apply a new flat rate and all transactions would be subject to that rate of VAT.
      • There are concerns that this could result in a distortion of competition.
    3. A net effective rate approach.
      • The rate applied to the splits will be based on an average rate from the previous year’s VAT returns.
      • The VAT return would then result in the payment or refund of any difference between VAT paid at the calculated rate and the actual VAT on the submitted VAT returns.

The underlying business (the merchant) will still be responsible for ensuring the correct amount of VAT is declared and paid.

The consultation runs until 29 June 2018.


Online Marketplaces: joint and several liability

Flat rate scheme

External link: Alternative method of VAT collection: split payment

Summary of questions

  1. Do you agree that the merchant acquirer is the best placed party to effect the split of VAT from the gross payment? If not, who do you think would be best placed and why?
  2. Do you think the government’s emerging thinking on a mechanism for split payment is workable? If not, how would you improve it?
  3. Do you think the use of the card issuer as a fall-back option would provide an effective safeguard for the mechanism by creating sufficient incentive to encourage merchant acquirers or PSPs to register with the scheme?
  4. Do you think that marketplaces, when they are involved in a sale, could have a role to play in effecting the split?
  5. Do you agree with the government’s assessment of these options for determining how much should be split from the gross payment?
  6. Are there any other options you would suggest to further simplify the process of calculating the amount to be split?
  7. Do you think the scope of split payment should be limited to overseas sellers, or should HMRC expand the scope to include online UK businesses?
  8. What changes do you anticipate as a result of PSD2? Will the existing parties, such as merchant acquirers, PSPs, or PISPs, continue to have a role to play in the future?
  9. Do you agree with the government’s thinking regarding how errors, adjustments, and refunds could be handled? Do you think there are better ways of resolving these issues?
  10. If you or your organisation is involved in the development of new payment technology, how long would you estimate it would take to create a system capable of implementing any of the proposals in this consultation? How much do you think it would cost?
  11. Is there anything else the government can do to enable the implementation of split payment?