United Kingdom: VAT Split Payment System Update

This document looks into how a split payment mechanism could be used to combat what HMRC perceives as online VAT fraud. HMRC considers that the merchant acquirer is best placed to split the VAT from the customer’s payment, as it is most likely to have information indicating that the supplier is overseas and the customer is in the UK.

Failing that, HMRC considers that either the payment service provider or the card issuer might be required to split the payment.

The development of a split payment system will clearly have implications, not only for those businesses which would become responsible for splitting payments, but also for suppliers whose payments would be split.

As regards the amount of VAT to be split, HMRC considers three options.

1. A standard rated split: Assuming all supplies to be standard rated, with overseas sellers adjusting for overpaid VAT through their VAT returns. HMRC recognises that overseas sellers might regard this as disproportionate, but considers that it would encourage overseas sellers to register for UK VAT in order to correct their VAT position.
2. A flat rate scheme: Based on the business sector in which the overseas seller operates. HMRC considers that this could disadvantage UK sellers trading above the flat rate scheme threshold.
3. A net effective rate: Each overseas seller would calculate its net VAT position (output VAT less input VAT) for the year and that would be used for the following year to determine the amount to be split from payments. At year end the business would make adjustments through its UK VAT returns to correct any under or over payments. This is HMRC’s initial preferred option, as it would also encourage compliance, particularly as the standard rated split would be applied if the overseas seller failed to comply with the net effective rate obligations.

The consultation document goes on to consider whether split payments should also apply to UK online, and possibly offline, sellers. They will also need to discuss how refunds and errors should be corrected and whether EU payment legislation would permit the splitting of payments to EU suppliers.

In other news, there’s also been recent updates anounced regarding the date propsed for the United Kingdom in leaving the EU VAT regime – having further implications on the VAT system.

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