Measures targeted at an army of overseas sellers using Amazon and eBay to evade VAT were at the heart of a £12bn tax clampdown announced by the chancellor.
A host of other tax avoidance strategies were also in George Osborne’s sights. They ranged from schemes that disguised an individual’s earnings as loans, to businesses taking on commercially unnecessary borrowings to lower their tax bills.
He also signaled a determination to tackle multinational corporations using a complex international chain of intra-group royalty fees to shift taxable income from the UK to tax havens. Well-known multinationals, including Starbucks and McDonald’s, have been accused of aggressively using royalty payments to shift taxable income from the UK.
Many of the anti-avoidance measures paraded by Osborne on Wednesday had already been agreed last October as part of a programme of international reform organised through the Organisation for Economic Cooperation and Development (OECD).
Among them was a cap on the tax deductions that companies can claim for interest payments arising from internal group loans. The prevalence of commercially pointless loans in tax planning was highlighted two years ago by the Luxleaks scandal. It showed how scores of multinationals were using billions of pounds of internal group lending, routed through Luxembourg, to avoid tax.
On Wednesday, however, the chancellor made it clear that the UK would adopt only the mildest of reforms recommended the OECD – a club of rich nations – in an attempt to tackle this abuse.
Nevertheless, the Treasury forecasts that caps on interest deductibility will generate £3.97bn in extra tax over the next four years.
There were meaures aimed at individuals too. Osborne announced fresh measures to tackle avoidance schemes that used so-called offshore “employee benefit trusts” (EBTs). Tax planners have been building clever schemes using EBTs for many years, much to HMRC’s frustration.
Meanwhile, the chancellor said a crackdown on a raft of measures used by high earners to disguise their earnings as other income had generated £100m more than expected. However, industrious tax planners had begun finding new ways around the legislation, requiring another round of crackdowns in this area.
Disguised earnings have been the cause of much embarrassment for high-profile celebrities in recent years, including the comedian Jimmy Carr.
Responding to new VAT evasion challenges presented by the booming digital economy, Osborne said tax inspectors would be given new powers to warn overseas sellers active in the UK through eBay and Amazon. If, after those warnings, sellers did not collect VAT correctly within 30 days, then eBay and Amazon could be held liable for the missing tax.
The Treasury estimates this measure will recoup £875m in lost VAT receipts over the next four years – although it is not expected to halt tax fraud altogether. The total cost to the taxpayer of this abuse was officially estimated at up to £1.5bn a year.
In Wednesday’s budget speech, Osborne acknowledged there had been a big rise in overseas suppliers storing goods in Britain and selling them online without paying VAT. “That unfairly undercuts British businesses both on the internet and on the high street,” he said.
Responding to the move, eBay said it welcomed “rules that ensure a fair marketplace”, but insisted it already took prompt action when alerted by HMRC to problem sellers not complying with VAT rules. It acknowledged there had been problems with Chinese sellers, but said: “We have contacted hundreds of Chinese sellers to notify and educate them on the need to comply with the law.”
In a statement, Amazon said: “We are currently reviewing the government’s proposals, and we will naturally comply with any legislation.”
Alongside new powers to hold Amazon and eBay liable for tax evasion by sellers, the chancellor set out plans for a new “fit and proper” test for warehouse operators dealing with goods shipped to the UK for sale online. Warehouses will be required to be registered by 2018. They will have to be able to show they have made checks to ensure they are not facilitating VAT fraud for online sellers based overseas.
For months, VAT campaigners have been calling for the government to hold Amazon and eBay liable for VAT fraud on their websites. While the chancellor has gone some way towards meeting their demands, they were disappointed that Amazon and eBay’s potential liability would be restricted to only those cases flagged by HMRC.
Campaigners said it was a mistake for the chancellor to task under-resourced UK tax inspectors with hunting down VAT evaders. Amazon and eBay are awash with hundreds of small pop-up sellers, based overseas, who are unlikely to be deterred if the new measures allow HMRC to catch only a small number of offenders.
In a thinly veiled attack on his Labour predecessors, summing up his tax measures Osborne said: “People talked about social justice but left enormous loopholes in our tax system for the very richest to exploit.” The chancellor said he expected the £12bn total to be raised by 2020.
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