The audit watchdog says its review will focus on HMRC’s role in administering the VAT system, including managing and reducing risks to the collection of tax revenue. The investigation will examine: how this particular type of tax evasion can occur; estimates of the size of the problem; how and when HMRC has responded to this particular type of tax evasion; and HMRC’s plans to keep this type of evasion in check in the future.

In March 2016 HMRC was given new powers to hold online marketplaces liable for unpaid VAT by overseas retailers. As a result, HMRC says 7,185 internet retailers came forward to register for VAT in 2016 – a more than ten-fold increase on 2015 when just 695 registered. Warehouses will have to join a due diligence scheme by 2018 or face penalties.

Under the new regulations, HMRC can make overseas traders register for VAT in the UK, or direct them to appoint a UK-established VAT representative, or provide a financial guarantee to HMRC.

Where the overseas trader does not comply with HMRC’s directions HMRC will put the online marketplace on notice. It may be held liable for the VAT in respect of the overseas trader’s future sales through its marketplace. The notice will also set out a period of time (normally 30 days) during which the online marketplace can take steps so it does not become liable, either by securing the VAT from the overseas business or by removing it from its marketplace. After this period of time, the online marketplace will be held liable if no such action has been taken.

The new powers along with the fulfilment house due diligence scheme in 2018 are predicted to raise £875m in total for the Exchequer by 2021.

The results of the NAO investigation are due to be published later in the spring.  Anyone who would like to provide evidence can email the study team on [email protected], putting the study title in the subject line.