UK Tax Authority Using 'Web Robot' To Detect VAT Cheats

by Amanda Banks, Tax-News.com, London

31 May 2006

The UK's National Audit Office says that HMRC collected more than GBP1bn from VAT on e-commerce last year, some of it by using an innovative Web Robot which searches for tax-dodging web-sites.

The value of internet sales, or e-commerce in the UK more than trebled between 2002 and 2004, says the NAO. Sales over the internet to UK non-business customers increased from GBP6.4 billion in 2002 to GBP18.1 billion in 2004, with a further surge around Christmas 2005, and are expected to rise to nearly GBP60 billion a year by April  2010.

Most sales over the internet are for goods, including goods traditionally sold by mail order companies such as books, electrical equipment and clothes. Around 71% of spending online was on goods in 2004, and about 22 million Britons shopped online in 2005, says a report from the NAO.

The report identifies risks to tax collection, including e-commerce businesses failing to register for VAT when they should; and loss of tax on goods ordered over the internet from outside the European Union.

HMRC judges that the overall risk to VAT revenue from e-commerce is currently low appears reasonable, says the NAO: 'While it is difficult to validate in terms of firm data on the actual amount of VAT collected from e-commerce, we found that other tax authorities have drawn similar conclusions on the overall level of risk. The Department has been alert to specific areas of risk which have emerged including the failure of e-businesses to register for VAT and the non-payment or underpayment of import VAT when due on goods ordered from outside the European Union (EU).'

The report says that a further area of risk identified is the possible erosion of VAT revenues with the growth in supplies of electronic services to UK customers from businesses outside the UK, and from UK businesses relocating to other EU countries with lower rates of VAT, where the main risk lies with businesses trading solely on the internet and e-marketplace traders (where a number of traders offer goods and services on a website at a fixed price and/or by inviting bids) rather than businesses which have introduced online operations alongside their existing business.

This is the area in which HMRC has deployed its Web Robot, an advanced search engine which can search the World Wide Web to identify websites and businesses that match particular profiles. Web Robot should assist the Department in carrying out more extensive and cost effective checks to ensure those selling on the internet are registering for VAT when required to do so, says the report.

The NAO also reports concerns about loss of tax on the 45 million small commercial consignments which are imported by post into the UK each year, many taking advantage of the de minimis GBP18 tax-free limit. Around half of the sales by value are from the Channel Islands where some UK-based retailers have set up business operations to take advantage of the UK reliefs in selling goods to UK customers ordering online, notes the report. The Channel Islands governments have taken steps to limit this trade, but since it is within the law, there is not too much that they can legitimately do.

As regards VAT on e-services supplied from outside the EU, the report says that HMRC should explore how to identify those non-EU businesses that supply UK customers and should be registered in the EU to pay VAT, working with tax authorities in other Member States where appropriate. Under EU legislation which was put in place on a temporary basis in 2003 and extended last week, non-EU businesses that supply services over certain limits to the EU are supposed to register for VAT in the countries they supply. It is not known how many have done so, or how many should do so.

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