The UK's VAT system is struggling to keep pace with digital commerce. A prime example is the rules for online marketplaces, which create a complex, two-tier system that is failing UK businesses and the Exchequer.

Currently, marketplaces are ‘deemed resellers’ responsible for collecting VAT on sales from overseas sellers. They are not responsible for sales from UK-based sellers, who must handle their own VAT compliance.

This distinction has created a critical flaw. It incentivises non-compliant sellers to find ways to falsely appear UK-based, often using shell companies and falsified documents. HMRC's recent guidance on ‘place-of-establishment’ checks underscores the complexity of policing this rule.

This fraud puts honest UK SMEs – who correctly account for VAT – at an immediate 20% price disadvantage, distorting competition. Independent economic analysis commissioned by Amazon estimates that up to £3.2bn of sales across all online marketplaces in the UK each year are made by bad actors who avoid VAT collection by exploiting this loophole.

The proposal

The solution proposed by Amazon is simple and structural: extend the 'deemed reseller' rules to apply to all third-party sellers on a marketplace, whether they are based in the UK or overseas.

In this ‘marketplace facilitator’ model, the marketplace itself would be responsible for calculating, collecting and remitting the VAT on every sale through its platform. This would remove the complex and fraud-prone place-of-establishment test.

Amazon’s analysis estimates this change would raise up to £700m annually for the Exchequer. This breaks down into two components:

• £541m from closing the VAT gap among sellers who should already be VAT registered but are evading compliance; and
• £160m from sellers currently operating below the VAT registration threshold.

The goal, as Amazon's blog states, is to "immediately close this loophole and create a fairer environment for compliant UK small businesses".

It's worth noting that such broad marketplace facilitator regimes are not unprecedented. The US has implemented similar rules in 46 of 50 states, and Switzerland introduced comparable rules on 1 January 2025 – neither with particular controversy despite Switzerland having a similar VAT threshold to the UK. The EU has committed to reviewing an extension of its goods deemed reseller rules as part of its VAT in the Digital Age package.

How it would help

This proposal represents a serious attempt to address a genuine structural problem in the VAT system. The current two-tier approach based on ‘place-of-establishment' has proven extremely difficult to police and has created significant opportunities for fraud. Evidence of systematic circumvention demonstrates that the problem is both substantial (with an estimated £3.2bn in sales by non-compliant sellers annually) and evolving faster than enforcement can keep pace.

The National Audit Office and Public Accounts Committee have both highlighted that the current system leaves HMRC and marketplaces "one step behind" evolving fraud. Refining place-of-establishment checks would only patch a system that is no longer fit for purpose.

The principles behind this model are compelling:

• It designs out the fraud rather than trying to police it: by making the marketplace responsible for all VAT collection, it removes the incentive and opportunity for sellers to falsely claim UK establishment status.
• It provides a direct mechanism to secure significant tax revenue: the estimated £700m annually represents substantial lost revenue that could be captured through a relatively straightforward rule change. The bulk of this (£541m) comes from sellers who are already required to be VAT registered but are currently avoiding compliance.
• It levels the playing field for compliant businesses: the current system creates an unlevel playing field that systematically disadvantages those following the rules by up to 20%.
• It uses platforms as an efficient point of tax collection: from a practical standpoint, collecting VAT from a relatively small number of large platforms is likely to be far more efficient for HMRC than attempting to pursue hundreds of thousands of individual sellers, many of whom may be deliberately difficult to trace or operating through shell structures.
• For many UK SMEs, this model could simplify their obligations: the marketplace would handle the VAT accounting and remittance for their marketplace sales.

What needs thinking about

On the other hand, should the entire system be redesigned to catch the non-compliant minority, when this necessarily affects the compliant majority?

While Amazon's proposal aims to simplify compliance for many sellers, it does create new obligations and potential complications for UK businesses that are already following the rules correctly. Of course, this could be argued to be the case for most anti-avoidance measures.

The policy questions it raises are substantial and require careful consideration. The treatment of sellers below the VAT threshold is particularly important – while the proposed disapplication regime offers a path to mitigate impacts, the practical operation of such a system needs detailed design work.

The creation of a larger population of repayment traders would have cash-flow implications for affected businesses. The split compliance burden for businesses selling across multiple channels adds a new layer of complexity. Crucial policy questions that tax professionals and policymakers must solve include:

1) What happens to UK-based micro-businesses selling on a marketplace who are not currently VAT registered because they are trading below the £90,000 threshold?

This would bring all their marketplace sales into the VAT net. While this simplifies the system, it would represent a significant policy change and have a significant financial impact for the smallest sellers. There is of course the possibility of implementing a carve-out mechanism to remove these businesses from scope. However, marketplaces would need an objective mechanism for determining which sellers are out of scope.

2) A VAT-registered UK business selling solely or primarily through an online marketplace(s) may end up in repayment position.

Some or all of its output tax would be remitted by the marketplace but it would still need to file VAT returns to reclaim its input tax from HMRC. Amazon’s analysis suggests the repayment population across all sectors would increase by around 12% with the total value of repayments increasing by 6%. This could create cashflow challenges for some businesses. Although this could be mitigated by a switch to monthly repayment returns, this would increase the administrative burden for those businesses and still amount to a cashflow impact of approximately £1.35 per £1,000 in VAT collected on average.

3) How would this model work for businesses that sell both on marketplaces and through their own websites?

They would face a new "split" compliance burden: managing their own VAT for direct sales while the marketplace manages it for other sales.

4) Businesses using the VAT flat rate scheme or the second-hand margin scheme would face additional complexity.

Amazon’s proposal is that the marketplaces would collect VAT at the full rate with those businesses then undertaking a “true up” calculation through their regular VAT returns to adjust the VAT actually due.

These concerns are real but not insurmountable. They require robust policy solutions and proper consultation with all stakeholders, but they should not prevent serious consideration and debate of the proposal.