In the Autumn Budget the Chancellor Philip Hammond announced a number of measures which will impact small businesses trading on marketplaces which we reported on earlier. Now it’s time to take a deeper dive into the announcements regarding VAT and examine what we can expect to see over the next couple of years and it doesn’t make pretty reading.
VAT Threshold Frozen for the first time in 30 years
The VAT Threshold wasn’t decreased in this Autumn Budget which many are lauding as a plus point. I see it as quite the opposite in fact as the Chancellor didn’t just say it wouldn’t be reduced bringing thousands more businesses into the VAT umbrella, he said that there would be no change for two years.
No increase in the VAT threshold is bad for micro businesses
This is really bad news on two counts. Firstly for those businesses who trade below the VAT threshold it means you can’t grow your business for two years without being forced to register for VAT.
Looking at our graph you will see that the threshold at which you must register for VAT has risen steadily by a couple of thousand pounds a year since the early 1990s. Pegging the threshold at £85,000 for two years is not only bad news for small retailers wishing to grow in the short term, but terrible news in the long term as inflation will eat away at the value of the VAT Threshold.
Review of VAT Thresholds
Even worse news than not applying an annual increase to the VAT registration Threshold is the suggestion of a consultation to consider slashing VAT to registration levels similar to those in other EU countries. A threshold of £20,000 for example would see just about every eBay seller having to register for VAT – it’s only £1,666 per month turnover.
This is a bad thing – it’s a ton of paperwork and at that level it’s punitive for the business turning over say £1500 a month who very slightly increases their business as they’ll lose 20% of their turnover (not profit) in VAT. Turn over £20,000 per year and pay £4,000 in VAT could mean many businesses don’t just see their profits slashed but could quite conceivably suddenly be running at a loss. It’s a huge barrier to entry for someone just starting out on a new marketplace business venture.
For those turning over significantly more trading close to the current £85,000 threshold it would mean up to a £17,000 slice of your turnover going to HMRC. Sure you can reclaim input VAT, but for many small businesses cost of goods is low and much of their value charged to customers comes from their time (i.e. no VAT to reclaim).
It will be even worse for other industries, think window cleaners, taxi drivers, hair dresses etc who will also lose 20% of their turnover.
VAT Joint and Several Liability
The Chancellor announced the introduction of joint and several liability legislation for all online marketplaces (that’s not just eBay, Amazon, Etsy, NotOnTheHighStreet, Yumbles and OnBuy, but also Airbnb, Uber, JustPark and any number of other marketplace services).
Also consider new marketplaces who may launch in the future – they will be lumbered with VAT worries from day one potentially putting them off and lessening competition. Retailers following Tesco, Halfords and GAME (who all launched their own marketplaces) might think twice about doing likewise if they are liable for any VAT their retailers don’t pay and fewer marketplaces is bad for the industry.
The legislation will enable HMRC to hold online marketplaces jointly and severally liable for any unpaid VAT of a non-UK business arising from sales of goods in the UK via that online marketplace where that marketplace knew or should have known that the non-UK business should be registered for VAT in the UK. It will also require online marketplaces to display a valid VAT number for all their sellers using their platform, when they are provided with one. They will also be required to ensure that VAT numbers displayed on their website are valid ot ensures that fictitious and hijacked VAT numbers are not displayed.
The legislation only applies to those businesses who are not compliant with their VAT obligations and HMRC will only issue notices to online marketplaces where it is satisfied that a business is non-compliant.
The thing is here, whilst we absolutely believe that marketplaces should do their bit to ensure sellers pay their taxes, often the marketplace has no idea where stock is held or what your total turnover is (apart from the bit on that particular marketplace). Amazon of course know exactly where you stock is if it’s in FBA, eBay frankly haven’t got a clue as they don’t hold your stock and don’t get to see you tax affairs so it’s tough for them to be held to account. Of course as soon as HMRC notify them of a suspicious account that may be dodgy we expect them to take action, but they appear to have been more than willing to do this.
eBay reported in September this year that they had only received a paltry 77 Joint and Several Liability Notices from HMRC resulting in blocking 184 sellers. Amazon have acted on 416 notices from HMRC (Unlike eBay, Amazon have a strict one account per retailer on their platform so we can assume they’ve blocked 416 accounts). It’s worth noting that from their own internal efforts eBay blocked a further 893 accounts with no imput from HMRC.
You might well think that HMRC could be a little more active in spotting VAT evaders but I couldn’t possibly comment.
VAT Split Payments
The thing marketplace traders should be most concerned about is what the review of VAT Thresholds and long term effect of Joint and Several Liability could be. It would be no surprise if within a couple of years marketplaces were ordered to collect VAT on every sale and remit to HMRC.
This would be an administrative nightmare and instantly hike prices on eBay overnight. Traders who are VAT registered would have to account for VAT already collected by the marketplace and report it on their VAT returns, but who will ensure that the marketplace applies the correct rates of VAT?
Merchants on special VAT schemes such as the Flat Rate or Margin Schemes would have to reclaim the VAT from HMRC, as would those who aren’t even VAT registered. Yes that’s right, if the marketplace collects VAT on your sales and you are not VAT registered you would have to register to reclaim the VAT that wasn’t due!
There is also the issue of VAT invoices – on some VAT schemes such as the Margin Scheme you aren’t allowed to give out VAT invoices. How would the marketplace know which VAT scheme you were on before they issued incorrect VAT invoices in your name?
We’ve already seen split payments announced for the US State of Washington from 2018 and similar measures are being introduced in Australia. With the will to eradicate VAT evasion it will be no real surprise if such measures are introduced in the UK within the next 2 to 5 years.