VAT – TaxWatch

Tech giants undermine African countries by failing to collect VAT

12th July 2021 by Alex Dunnagan

African countries are missing out on significant tax revenues because multinational tech giants are failing to collect and pay VAT on services, according to new research.

A new report published by TaxWatch finds that Microsoft, Google and Facebook are not collecting VAT on sales made to customers in most African countries, even in some countries where they have a local office.

The companies say that they will only collect VAT and sales taxes in countries that have levied specific taxes on digital products, claiming that it is up to the customer to pay any taxes due.

However, analysis from TaxWatch shows that these companies should be required to register for VAT under existing VAT rules in many African countries if they make significant sales.

VAT, a tax on the final consumption of goods and services, is an important source of revenue for tax authorities. An analysis from the OECD shows that on average VAT accounts for 30% of tax revenues in Africa, as opposed to taxes on individuals, which make up just 15.4%. Taxes on corporations account for 18.6% of tax revenues on average.

Since 2013 a number of African countries have changed their laws so VAT is collected on products, such as advertising, sold to customers.

The report does not make any estimate of the amount of money that could be raised if digital companies registered for VAT, as this would require detailed knowledge of the amount of sales made in each country. However, evidence from countries that have enacted a digital sales tax shows that the gains could be significant.

In 2014 South Africa became one of the first countries in the world to introduce specific legislation on VAT and digital services. The South African Revenue Service has said that it has collected an additional R600m a year since the introduction of the rules.

TaxWatch Executive Director, George Turner, said: “Big tech has for years traded on the myth that because they invoice their clients from offshore, they somehow have no obligation to pay any taxes. Our research demonstrates that this simply is not the case. If these companies have made significant sales in any country that levies VAT, then they should register to pay VAT locally.

“Google, Facebook and Microsoft wouldn’t get away with such an approach in Europe or North America anymore.

“I would encourage tax authorities across the continent to cast a close eye on the activities of these companies in their jurisdiction, and pursue them for any VAT payments that should have been made. This is likely to be a far more significant issue than any corporate tax avoidance engaged in by tech companies, as VAT makes up a far higher proportion of tax revenues than corporate profits.”

When questioned on the findings of this report, a Microsoft spokesperson stated: “Microsoft is fully compliant with all local laws and regulations in every country in which we operate. We serve customers in countries all over the world and our tax structure reflects that global footprint.”

Google did not respond to our requests for comment.

The report is available on our website here and in PDF here.

This research was featured in Law360 and PQ Magazine.

Digital Giants and VAT in Africa

12th July 2021 by Alex Dunnagan

12th July 2021

This report is available as a PDF here.

Summary

Multi-national tech giants such as Facebook, Google, and Microsoft (operating out of their Irish subsidiaries) are failing to collect VAT on sales they make in Africa – even in countries where they have local offices. This appears to be in contravention of local VAT laws requiring non-resident companies to register for VAT, and could be leading to large sums of tax going uncollected.

VAT and Digital Services

Value Added Tax (VAT), known as a goods and services tax (GST) in many jurisdictions, is designed to be a broad based tax on the final consumption of goods and services.¹ As such it is a major source of revenues for governments around the world. In Africa VAT accounts for on average around 30% of government revenues.²

VAT is a destination based tax, where the tax rate is based on the location of the consumer. The tax is usually collected by the seller, and is often applied to the sales price. Businesses can claim back the VAT that has been added to goods and services they have bought if they are used in the making of other supplies that are subject to VAT.

For example, a business selling cars adds VAT to the price of the cars it sells. It also buys advertising from a third party to encourage people to buy its cars. While the supply of advertising services to the car seller would be subject to VAT, the advertising firm would be able to offset that “output VAT” against its own “input VAT” costs, such as billboard hire.

When the car seller calculates the VAT they need to send to the tax authority, it is able to deduct the VAT it has paid on the purchase of the adverts. The effect of this is that VAT is assessed on the value added on each part of the production process but ultimately borne by the final consumer and collected by the final seller of the goods.

For similar reasons VAT is not charged on exports by a country exporting goods and services, but is charged on imports of goods.

VAT and the digital economy

VAT has been a particular problem for tax administrations when applied to digital services.

Goods imported into a country cross physical borders where checks can be carried out and taxes levied. Digital services provided remotely are not subject to border checks. This can make it very difficult for tax authorities to enforce VAT charges on digital services provided from abroad.

This is an issue that tax authorities and the OECD have been aware about for some time. In 2013 South Africa announced it would be one of the first countries in the world to introduce specific rules on VAT on digital companies.

The National Treasury stated at the time:

“The current application of VAT on imports does not lend itself to the effective enforcement on imported services or e-commerce where no border posts (or parcel delivery agents like the Post Office) can perform the function as collecting agents, as is the case with physical goods”.³

After initial regulations were introduced in 2014, which only applied to a limited amount of electronic services, further legislation came into effect on 01 April 2019, widening the definition of electronic services to include any “electronic services” supplied by an electronic agent, electronic communication or the Internet.⁴ ⁵ This widening of the net encompasses anything from software to advertising services.

In 2012 the OECD set up the Global Forum on VAT. This resulted in the publication of a set of guidelines for VAT in 2016.⁶ Following the BEPS process, the OECD recommended that countries adopt the guidelines to assist with combating tax avoidance in the digital sector in September 2016. These guidelines included the destination principle, which obliges non-resident sellers to pay VAT in the country that they sell their goods. This often requires sellers from overseas to register for VAT or to appoint a local agent to be responsible for their VAT payments.

In 2019 it was reported that there were over half a billion monthly internet users in Africa, more than in Latin America, North America, or the Middle East.⁷ As internet penetration in Africa grows, so to will the scale of the problem.

Do laws need updating?

The position of some companies is that without new legislation, there is no obligation to collect or pay VAT.⁸ Our research shows that the issue is with compliance and enforcement, not with the law itself. Legislation doesn’t need to be updated in order to require foreign digital advertisers to collect tax.

We found that the major suppliers of digital advertising services are not applying the law with regard to VAT in Africa, irrespective of whether or not legislation has been updated.

Looking at VAT legislation in many African countries, it is clear that non-resident companies are required to either register as a VAT vendor in the host country, or, to appoint a registered local representative.

Below we have highlighted a select few African countries where the standard message from digital advertising companies is that it is for the customer to self-assess, whether they should be paying VAT.

Algeria

Algeria introduced new VAT rules on foreign suppliers in January 2020,⁹ which confirms that operations carried out over the internet are subject to VAT, and that there is no VAT liability threshold.¹⁰

Angola

Angola introduced new VAT rules in October 2019, with a January 2020 Administrative Ruling stating that digital service suppliers are required to register with the Angolan Tax Authority, appoint a representative in country, to collect and pay VAT in Angola.¹¹

Cameroon

Cameroon changed its VAT rules for foreign suppliers of e-commerce in December 2019, with suppliers now having to register with the country’s tax authority in order to meet their obligations.¹²

Since October 2020, Facebook has begun adding VAT to Cameroonian invoices. Microsoft and Google have not followed suit.

Ghana

With a threshold of GH¢200,000 (approximately £25,000), VAT applies to the supply of telecom, broadcast, data and electronic services to consumers.¹³

Kenya

The Kenyan Revenue Authority has announced its intention to crack down on VAT dodging by tech companies, saying that it would work with the Communications Authority of Kenya to get information on which companies are selling into the country.

The KRA deputy commissioner for corporate policy, Maurice Oray, said:

“If you are a resident here, you are supposed to pay the taxes the normal way. If you are not a resident but you have an app that’s being used here, your tax representative (a requirement under Section 16 of Tax Procedures Act) must pay your VAT and income tax.”¹⁴

Since April 2021, Facebook has begun adding VAT to Kenyan invoices. Microsoft and Google have not followed suit.

Malawi

Though it wasn’t always the case, Malawi reintroduced VAT on internet service from July 2013.¹⁵ Malawi has a VAT threshold of MWK 10m (approximately £9,500).

Namibia

With a VAT threshold of NAD 500,000 (approximately £24,5000), there are no special rules for the taxation of the digital economy in Namibia.¹⁶

Nigeria

Section 10 of Nigeria’s Value Added Tax Act 1993 No.102, states:

“(1) For the purpose of this Act, a non-resident company that carries on business in Nigeria shall register for the tax with the Board, using the address of the person with whom it has a subsisting contract, as its address for purposes of correspondence relating to the tax.

(2) A non-resident company shall include the tax in its invoice and the person to whom the goods or services are supplied in Nigeria shall remit the tax in the currency of the transaction.”¹⁷

It appears companies such as Google, Facebook, and Microsoft are required to include VAT in their invoices so that the customer to whom the supply is made in Nigeria can remit the VAT to the tax authority. There is a similar situation in many other African countries.

Tanzania

The Tanzanian VAT Act was updated in 2015, clarifying that digital and electronic services provided to consumers are subject to VAT.¹⁸

Uganda

Uganda has clarified the requirements for foreign providers of digital services to levy 18% VAT on sales to local consumers, and that non-resident providers must register with the Ugandan Revenue Authority.¹⁹

Despite several of these countries updating their legislation, and many saying explicitly that VAT should be charged on the supply of digital services by foreign suppliers, it appears that the online advertising companies didn’t get the memo.

Digital advertisers in Africa

Google, Microsoft and Facebook all run their Europe, Middle East, and Africa (EMEA) operations out of Ireland. Despite being classed as one region for administrative purposes, the continent of Africa is treated very differently to that of Europe.

We made a test purchase of Google advertising in the UK, advertising TaxWatch, and received an invoice which did include VAT. However, according to Google’s own website it does not charge VAT on purchases made in most parts of Africa.

Any output VAT Google collects in relation to supplies to UK customers could be offset against Google UK’s input VAT expenses. By contrast, there is no such incentive to collect output VAT in those African countries where Google does not have input VAT costs. Absent the opportunity to offset input VAT, the incentive flips: VAT-free sales are preferred because the lower cost to the consumer is likely to boost sales volumes.

Outside of the European Union, and South Africa, customers seeking information on VAT on the Google website are told “Google can’t charge VAT if your billing address is in a country that’s not part of the European Union”.²⁰ The use of the word ‘can’t’ is clearly incorrect, because the company does charge VAT on South African accounts.

Instead, potential customers are told that they should self assess as to whether they should pay the VAT themselves. It is likely that many people do not self-assess, and any VAT that is required to be paid is lost. If those that are required to self-assess do not, then they themselves are committing tax evasion.

Google did not respond to our requests for comment.

Facebook appears to have a similar policy. Setting out the following on their website:

“If your country isn’t listed, that means we don’t have tax information for that country. Please contact your local tax authority for this information.”²¹

The site then sets out the position in a number of countries where VAT is added to the bill. The countries listed by Facebook include South Africa, Zimbabwe, and Cameroon where it is stated that VAT will be added to invoices where the customer is located in those countries. For Zimbabwe and Cameroon, this is a relatively recent addition with the site stating that it started to add VAT in those countries from late 2020. A Ghanaian Facebook advertising invoice seen by TaxWatch showed only the cost and an Irish VAT registration number – no VAT had been added to the bill.

When asked why Facebook doesn’t charge VAT on advertising sales made outside of the EU, the response we were given was:

“Facebook is registered, charging and remitting VAT in countries outside of the EU where applicable legislation has been implemented requiring foreign providers to tax the supply of electronic services (e-services). Tax regulations vary country by country. In general the e-services regimes apply to the supply of services to consumers. Advertising is, in general, supplied for business purposes. For example, in South Africa, the e-service VAT regime developed over the years and it is now applicable to the supply of e-services to both businesses and consumers. FB is registered, charges and remits applicable VAT. “²²

Facebook’s statement does not appear to be accurate. Ghana’s VAT Act specifically says that non-residents who provide “telecommunication services or electronic commerce” must register if they are likely to make sales exceeding 120,000 Ghana Cedis ($20,900) per year.²³ However, Facebook’s pages on VAT do not mention Ghana.

With a population of 30 million, we suspect that Google Ads likely exceeds this low threshold.²⁴ We questioned Google as to the value of their advertising sales in Ghana, but the company refused to comment. Microsoft’s website states explicitly that it does not charge VAT on advertising in African countries (outside of South Africa) – stating that it is not required to do so.²⁵

When questioned on the findings of this report, a Microsoft spokesperson stated “Microsoft is fully compliant with all Local laws and regulations in every country in which we operate. We serve customers in countries all over the world and our tax structure reflects that global footprint.”

Even without a physical presence, Microsoft operates in every country in which it does business. As a global seller of software and advertising, that includes African countries in which it is required to collect VAT.

All of these approaches appear to run counter to the law in many African countries, which states that non-resident companies should register for VAT if they are selling into those countries.

Legislation in many African countries is clear that non-resident companies are required to either register as a “VAT vendor” in the host country or to appoint a registered local representative. This is also stated in tax briefings prepared by large accountancy firms for the region.

Impacts

It is beyond the scope of this study to determine the impact of non-compliance on the continent as a whole. This would require substantial work to calculate and necessitate detailed knowledge of advertising sales in each country. It would also be complicated by the fact that many businesses that purchase advertising would largely be able to reclaim the VAT paid on advertising sales.

However, there are important consumers of advertising who do not provide services which are subject to VAT and therefore would be subject to VAT on their purchases of advertising. This includes political parties and NGOs.

In addition, commissions earned on online marketplaces (for example the Google Play Store) would be subject to VAT.

In South Africa, Prenesh Ramphal of the South African Revenue Service (SARS) has stated that between 2014 and 2019, the new regulations implemented there collected in excess of R600 million ($43 million) a year – around R3 billion ($215 million) in its first five years.²⁶ With the 2019 addition to the regulation casting the net further to include all electronic services, SARS can expect to collect even larger amounts of VAT in future years.

VAT legislation is clear that non-resident sellers should be collecting VAT on behalf of the local tax authorities. We believe that tax authorities on the continent should take a close look at whether the digital giants have incurred substantial VAT liabilities in their jurisdictions which have yet to be paid.

1VAT is collected fractionally, via a system of partial payments whereby taxable persons deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities. It is a consumption tax because it is borne ultimately by the final consumer.

2OECD, Revenue Statistics in Africa 2020, https://www.oecd.org/tax/tax-policy/brochure-revenue-statistics-africa.pdf

3Electronic Services Regulations, Parliamentary Monitoring Group, 04 February 2014, https://pmg.org.za/call-for-comment/162/

4Regulators widen definition of ‘electronic services’, IT Web, 07 June 2019, https://www.itweb.co.za/content/mQwkoq6KbYmv3r9A

5Prepare for tax in digital economy, Mail & Guardian, 24 May 2019, https://mg.co.za/article/2019-05-24-00-prepare-for-tax-in-digital-economy

6International VAT/GST Guidelines, OECD, 12 April 2017, https://www.oecd.org/ctp/international-vat-gst-guidelines-9789264271401-en.htm

7Last Month, Over Half-a-Billion Africans Accessed the Internet, Council on Foreign Relations, 25 July 2019, https://www.cfr.org/blog/last-month-over-half-billion-africans-accessed-internet

8Email from Facebook sent to TaxWatch 19 August 2020

9Algeria will levy VAT on Digital Services, Global VAT Compliance, 20 March 2020, https://www.globalvatcompliance.com/algeria-will-levy-vat-on-digital-services/

10Algeria enacts 2020 Finance Act, EY, https://taxnews.ey.com/news/2020-0159-algeria-enacts-2020-finance-act

11Angola VAT system introduced, replacing old consumption tax, Taxamo, 20 January 2020, https://blog.taxamo.com/insights/angola-vat-system-introduction

12Section 149c of the 2020 Finance Law, it states “The VAT due on commissions received on sales in Cameroon through e-commerce platforms shall be declared and paid into the Treasury by the operators of these platforms”, https://www.prc.cm/en/multimedia/documents/8033-law-2019-023-of-24-dec-2019-of-2020-financial-year

13Ghana VAT on foreign B2C digital service providers, Avara, 22 November 2015, https://www.avalara.com/vatlive/en/vat-news/ghana-vat-on-foreign-b2c-digital-service-providers.html

14Kenyan Revenue Authority to commence taxing income-generating apps, Techpoint Africa, 15 August 2019, https://techpoint.africa/2019/08/15/kenyan-revenue-authority-taxing-apps/

15Malawi re-imposes internet services VAT, Avalara, 29 July 2013, https://www.avalara.com/vatlive/en/vat-news/malawi-re-imposes-internet-services-vat.html

16Namibia – Indirect Tax Guide, KPMG, https://home.kpmg/xx/en/home/insights/2019/02/namibia-indirect-tax-guide.html

17Nigeria Value Added Tax Act 1993, https://www.firs.gov.ng/sites/Authoring/contentLibrary/035860b3-9ecf-400f-8d03-4335e4be5d19Value%20Added%20Tax%20(VAT).pdf

18Tanzania VAT changes, Avalara, 02 July 2015, https://www.avalara.com/vatlive/en/vat-news/tanzania-vat-changes.html

19Uganda VAT on foreign e-services, Avalara, 27 October 2019, https://www.avalara.com/vatlive/en/vat-news/uganda-vat-on-foreign-e-services.html#:~:text=Uganda%20has%20clarified%20the%20requirements,online%20clubs%3B%20and%20dating%20websites.

20Taxes in your country, Google Support, https://support.google.com/google-ads/answer/2375370?hl=en-GB

21Will I be charged tax on my purchases of Facebook ads?, Facebook, 16 July 2020, https://www.facebook.com/business/help/133076073434794

22Email sent to TaxWatch 19 August 2020

23Section 6 of Value Added Tax Act 2013, https://gra.gov.gh/wp-content/uploads/2018/11/vat_act_870.pdf

24Alphabet Inc. 10-k for fiscal year ended December 31 2018, reveals that the revenue for Google Ads in the Europe, Middle East and Africa (EMEA) region was $44.5bn in 2018. This means that Google would only have to generate 0.000047% of its EMEA revenue from Ghana in order to cross the threshold requiring the company to register for VAT.

25Tax or VAT information, Microsoft Ads, https://help.ads.microsoft.com/apex/index/3/en/52032

26New VAT rules lead global tax reform, Mail & Guardian, 26 April 2019, https://mg.co.za/article/2019-04-26-00-new-vat-rules-lead-global-tax-reform

The Deloitte Disaggregation

27th May 2021 by Alex Dunnagan

Sports Direct worked with big four accountancy firm Deloitte on a VAT scheme that has led to litigation in several European countries.

The findings have emerged in High Court papers lodged as part of an ongoing case brought by the Financial Reporting Council against Frasers Group, formerly Sports Direct International Plc.

TaxWatch has published a report, ‘The Deloitte Disaggregation‘, setting out the case.

The scheme involved contracting out deliveries to a company set up by Mike Ashley’s brother, which had no vehicles or drivers.

Grant Thornton did not disclose this relationship in company accounts and have since quit as Sports Direct’s auditors.

A number of European countries are known to be concerned about the scheme with the potential losses to tax authorities likely to be very significant, perhaps running into the billions.

The case illustrates again how, despite claims to the contrary, leading elements of the tax industry remained in the business of designing and marketing complex tax avoidance schemes.

The Deloitte Disaggregation

27th May 2021 by Alex Dunnagan

27th May 2021

Why Sports Direct hired a delivery company with no drivers and no vehicles.

Mike Ashley’s Frasers Group (formerly Sports Direct International), which recorded revenues just shy of £4bn last year, is facing challenges from several European tax authorities over its involvement in a scheme used to avoid the payment of VAT outside the UK. Details of the arrangement were revealed for the first time in a UK court ruling. They saw Sports Direct contract out delivery of goods to customers on the European continent to Barlin Delivery Limited, a company set up by Ashley’s elder brother. It in turn used providers such as DHL, in the hope that this would mean for tax purposes Sports Direct was not providing goods to European customers, and could thus pay VAT in the UK, rather than where the customer was based. The scheme, designed by accountancy firm Deloitte and apparently sold to a number of retailers will have potentially cost European tax authorities billions of Euros in lost VAT receipts.

UK VAT

EU countries began co-ordinating VAT rates in 1992 in order to level the playing field, introducing a minimum standard rate of 15 per cent.¹ However, large discrepancies remain, with rates ranging from 17 per cent in Luxembourg to 27 per cent in Hungary.² At 20 per cent, the standard rate of VAT on most goods and services in the UK is lower than that in many European countries. In addition to this, a reduced rate of five per cent applies to some goods and services and a zero rate applies to others, including most food, books and newspapers, and children’s clothing.³ As a result of this zero-rating children’s clothing and footwear are VAT free in the UK,⁴ making them substantially cheaper than across the EU where VAT is charged.

Distance Selling

The application of VAT to international trade is based on the destination principle, which means that exports are free of VAT, with imports taxed at the local rate.⁵ Therefore, most goods exported to non-EU countries and all goods supplied to customers who are registered for VAT in another EU member state are zero-rated.

For supplies to customers who are not registered for VAT in another EU member state (including private individuals) VAT is normally accounted for by the supplier as a domestic supply in the EU member state from which the goods are dispatched.⁶ This means that the seller should register for VAT in the customers’ country, and pay the local VAT rate.⁷

So, when Sports Direct sells standard-rated clothing to a customer in Finland, and dispatches the goods to the consumer, VAT should be payable in Finland at the local rate of 24 per cent, not in the UK at 20 per cent. The same would be true if the carriage of goods was carried out “on behalf of” the supplier, i.e. Sports Direct.

The 2010 Avoidance Structure

In January 2010 Sports Direct set up a structure which they hoped would get around the requirement to register with foreign tax authorities for the sale of goods via their website to customers overseas.

The structure involved setting up a UK company, Etail Service Ltd, to provide fulfilment services. Etail had no employees other than the directors.⁸

The idea was that after Sports Direct made a sale to a customer overseas, the customer would then contract with Etail limited to deliver the goods. Sports Direct hoped that this would mean that the delivery or supply would not be happening “on behalf of the company” because the customer would be contracting directly with Etail merely for the delivery.

The scheme was designed by Deloitte, which court documents state had also been sold to several other UK Retailers. Irish tax authorities refer to this as a “disaggregated VAT scheme”.

Reaction of tax authorities to the scheme

Sports Direct wrote to HMRC to ask whether they agreed that the supply would be subject to UK VAT rather than VAT in the relevant EU country, given that Etail was separate to Sportsdirect.com.

Under UK VAT rules, a sale only becomes exempt from VAT if it is subject to VAT elsewhere. This is to prevent companies from not paying VAT anywhere by claiming a sale is made abroad.

In its 2010 letter to Sports Direct, HMRC agreed that as the company was not supplying and delivering the goods there would be no distance sales, and therefore the company could pay UK VAT. However, HMRC did recommend that Sports Direct contact the relevant tax authorities in the country it was selling in to make sure VAT was not payable there. If the response from those countries was that VAT was due there, Sports Direct could apply for a refund of any UK VAT.

Sports Direct did not inform HMRC of any contact with foreign tax authorities, and a subsequent court case between HMRC and Sports Direct confirms that HMRC told Sports Direct over the following five years on several occasions that it should contact foreign tax authorities to confirm its VAT position overseas.

The 2015 Avoidance Restructure

In June 2014 Sports Direct received an email from the French tax authorities, asking whether French or English VAT was paid on goods sold into France.⁹ With tax authorities across Europe beginning to challenge similar structures adopted by other retailers, Sports Direct sought to alter its online sales structure. Sports Direct disclosed in court documents that the new structure was put in place “for the exclusive purpose of responding to the real and present threat of litigation that was anticipated from the French tax authority and other tax authorities”.¹⁰

Before a change could be made the Irish Revenue contacted Sports Direct in January 2015, asserting that it should be paying VAT in Ireland when selling to Irish customers. This is the subject of ongoing litigation.

On the advice of Deloitte, the sales structure was altered in February 2015, introducing newly incorporated Barlin Delivery Limited, a delivery company set up and owned by John Ashley, Mike’s elder brother. John had only left Sports Direct, where he had been an IT director, that year. In a move heavily criticised by shareholders, in 2017 Sports Direct asked investors to approve an £11m payment to John for supposedly being underpaid for his work from 2007 to 2015. The payout was blocked.¹¹

While the 2010 structure was relatively transparent, in that public accounts clearly showed that Etail was owned by Mike Ashley, the 2015 structure appears to have been an attempt to muddy the waters in order to get round VAT legislation.

When the arrangement was changed in 2015, Sports Direct’s website explained that Barlin “does not sell goods, but only delivers them.” When placing an international order with Sports Direct, Terms and Conditions would state that “a contract to deliver the goods takes effect between you and Barlin Delivery.”

However, Barlin owned no trucks and employed no drivers. The company was registered to a residential property in a cul-de-sac in Cleethorpes.¹² Barlin effectively acted as a middle man, paying couriers such as DHL to collect parcels from a Sports Direct warehouse.

Companies are generally required to provide information regarding dealings with related parties where there is a common interest, such as business relationships with close family members of directors. The Barlin Delivery arrangement was not disclosed in Sports Direct’s published accounts.

The then Sports Direct chairman, Keith Hellawell, insisted in 2016 that it was not “technically required” to disclose the deal, though added that telling investors might have been a “useful additional disclosure”.

After the Financial Times reported on the matter in 2016, the accountancy watchdog the Financial Reporting Council (FRC) began investigating the arrangement,¹³ looking at the conduct of auditor Grant Thornton and why the relationship between Sports Direct and Barlin wasn’t declared in the 2016 Financial Statements.¹⁴ Following the launch of this investigation Barlin was quickly dissolved. To what extent Grant Thornton were aware of the Deloitte – Sports Direct VAT avoidance scheme should be clearer once the FRC investigation has concluded.

Continental questioning

In 2015 HMRC seems to have become concerned that arrangements like the one deployed by Sports Direct could be used to undermine competition within the single market. It (and, separately, Belgium) asked the EU VAT committee for its thoughts about this distance selling arrangement. The committee was set up in order to promote the VAT directive and consists of representatives of EU Member States and of the Commission. The response was that tax authorities should look at the “economic reality” rather than the “literal approach of looking at the contractual structure”.¹⁵ What this essentially meant was that if a customer ordered goods from Sports Direct, the company is liable to account for VAT in the buyer’s country, and can’t use Barlin as a get out.

The pre-2015 investigations launched by both the French and Irish tax authorities were later joined by litigation from the Belgian and Finnish tax authorities.

In August 2015 French tax authorities launched a formal investigation into Sports Direct’s VAT arrangements, and have since concluded that VAT is payable in France. This is also the subject of ongoing litigation.

In May 2017 the Finnish tax authorities decided that Sports Direct should be paying VAT in Finland, which has led to litigation. That same year, the company’s chairman Hellawell tried to put a positive spin on the company’s financial report by claiming it had contributed £1.8bn in taxation to the UK economy. Critics quickly pointed out that £1.3bn of this was actually VAT paid by customers.¹⁶

In 2019 Sports Direct was the subject of a tax audit in Belgium, with Belgian authorities billing the company €674m including 200 per cent penalties and interest.¹⁷ ¹⁸ The tax bill led to a delay in publishing Sports Direct’s annual accounts, and saw Grant Thornton quit as the company’s auditor.¹⁹ Eventually RSM was appointed as auditor, ending speculation that the government may be forced to intervene if no other auditor was willing to take on the job.²⁰

The 2020 annual report of the Frasers Group, which owns Sports Direct, states that the Belgian tax enquiry has been settled for “an immaterial amount” with “no material consequences”.²¹

The future of European VAT

The UK exited the EU VAT regime, along with the Customs Union and Single Market, from 1 January 2021. This means that supplies between the UK and the EU are now imports or exports, subject to UK or EU VAT.

One result of this change is the loss of Distance Selling thresholds for UK sellers to EU consumers. UK retailers will now have to register for VAT purposes in EU states if they want to sell in the EU, regardless of how much trade they do. ²²

Different rules will also apply to Northern Ireland, which may result in businesses from mainland Britain relocating to Northern Ireland in order to receive easier access into European markets.

The EU 27 have agreed to introduce new legislation as part of the EU Ecommerce Package, which comes into effect 01 July 2021, in order to address attempts to exploit distance selling to avoid VAT. The reforms include the launching of the ‘One-Stop-Shop EU VAT return; ending low-value import VAT exemption; and making marketplaces deemed supplier VAT.²³

So what?

We do not know what per cent of Sports Direct sales to Europe are goods zero-rated in the UK, and we do not know how many sales are in countries with higher VAT rates than the UK. As a result of this, we don’t know how much this scheme will have saved Sports Direct. However, even a saving of between 1-2 per cent on a turnover measured in billions would result in significant losses to tax authorities, and with margins in the retail sector razor thin, this kind of scheme would also result in a substantial unfair advantage over competitors.

What is more, is that this scheme appears to have been used by more than one company so the potential losses to tax authorities could be very significant, running into billions.

Perhaps most importantly of all, the case also reveals how, despite claims from the tax industry following the global financial crisis that major consultancies are no longer in the business of designing and marketing complex tax avoidance schemes, they do still appear to be.

Sports Direct / Frasers Group did not respond to our request for comment before publication, however, they did provide comment to The Guardian which published an article in part based on our research.

Sports Direct said that Barlin had not been set up to reduce its tax bill but was instead to used to reduce administrative complexity. The company and suggested it had settled with some foreign tax authorities and remained in discussion with others. It declined to give further details.

“It would be inappropriate for the group to comment further on the progress of settlement negotiations or to provide details of settlements which have been reached,” the company said in a statement to the Guardian.

“As we have repeatedly stressed, the group is adopting a fully cooperative approach with HMRC and EU member states in order to ensure VAT was paid in the correct place.

“That process is not yet complete – progress has been slowed by the ongoing pandemic – but we hope and expect that it will be completed soon.”

Sports Direct told the Guardian that it was “not thought necessary” to check its structure with foreign tax authorities because HMRC had not objected to tax being paid in the UK.²⁴

Deloitte did not respond to our request for comment.

Following publication, we were contacted by lawyers acting for Frasers Group, who asked us to publish the following on the record statement from their client. Frasers Group refused to answer any further questions regarding the arrangements.

“Acting on advice from its tax advisors, the Group arranged its online sales to ensure VAT was due and payable in the UK on all relevant sales for the period 2010-2017. This approach was consistent with many other retailers in the UK and across Europe and did not give the Group any unfair advantage.

The arrangements were made for the purpose of reducing the significant administrative cost and complexity that would arise from registering for VAT in multiple jurisdictions across the EU many of which had low levels of sales at that time.

VAT was always charged at the UK rate and accounted for to the UK, as originally agreed by HMRC. HMRC was fully informed throughout this period of how the Group accounted for VAT.

Throughout this period HMRC had (and continues to have) a Customer Compliance Officer attached to the Group with whom the Group is in regular contact.

As soon as it was apparent that the meaning of Article 33 of the EU Principal VAT Directive applicable to distance sales might be open to interpretation, the Group itself took steps to agree an approach with HMRC to have the meaning of Article 33 clarified by the CJEU. This was finally clarified by the CJEU in a preliminary ruling in June 2020 [Case C-276/18 KrakVet.]”

Photo by Christian Lue on Unsplash

1 Directive 92/77/EEC (later updated with Directive 2006/112/EC), Eur-Lex, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A31992L0077

2 EU VAT Rates, VAT Number Formats & Thresholds, VAT Global, https://www.vatglobal.com/eu-vat-table/

3 HMRC Guidance, ‘VAT rates on different goods and services’, https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services

4 HMRC Guidance ‘Young children’s clothing and footwear (VAT Notice 714), https://www.gov.uk/guidance/vat-on-young-childrens-clothing-and-footwear-notice-714#articles-of-clothing-or-footwear

5 OECD international VAT/GST Guidelines, OECD, 28 June 2011, https://www.oecd.org/tax/consumption/guidelinesneutrality2011.pdf

6 HMRC Guidance, ‘The single market (VAT Notice 725)’ paragraph 6. https://www.gov.uk/guidance/vat-and-the-single-market-notice-725

7 To make things easier for small businesses, sales below a certain threshold can be paid to the tax authority in the seller’s home country rather than the destination country. The VAT threshold varies from country to country, ranging from €0 in Spain, to €75,000 in Ireland. With an annual turnover in the billions, Sports Direct would not qualify as one of such small businesses.

8 Upper Tribunal Decision, Gov.uk, 19 July 2017, https://assets.publishing.service.gov.uk/media/598daa1eed915d57479fd2d4/HMRC_v_SportsDirect.pdf

9 The Financial Reporting Council LTD v Frasers Group PLC [2020] EWHC 2607 (Ch), Bailii, 05 October 2020, https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Ch/2020/2607.html

10 The Financial Reporting Council LTD v Frasers Group PLC [2020] EWHC 2607 (Ch) at para 21(3).

11 Sports Direct shareholders block £11m payout to Mike Ashley’s brother, The Guardian, 13 December 2017, https://www.theguardian.com/business/2017/dec/13/sports-direct-shareholders-block-11m-payout-to-mike-ashleys-brother

12 Registered office address, Companies House, https://find-and-update.company-information.service.gov.uk/company/09426077

13 Sports Direct tears up deal with Mike Ashley’s brother, Financial Times, 15 June 2017, https://www.ft.com/content/9fcac524-5108-11e7-bfb8-997009366969

14 The Financial Reporting Council LTD v Frasers Group PLC [2020] EWHC 2607 (Ch), Bailii, 05 October 2020, https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Ch/2020/2607.html

15 Sportsdirect.com Retail LTD & SDI (Brook EU) LTD V Revenue and Customs [2017] UKUT 0327 (TCC) Bailii, 24 October 2016, https://www.bailii.org/uk/cases/UKFTT/TC/2016/TC05445.html

16 Sports Direct chairman tries to palm off VAT receipts as “tax contributions”, The London Economic, 20 July 2017, https://www.thelondoneconomic.com/news/sports-direct-chairman-tries-palm-off-vat-receipts-tax-contributions/20/07/

17 Sports Direct gets all-clear in Belgian tax row, The Telegraph, 30 January 2020, https://www.telegraph.co.uk/business/2020/01/30/sports-direct-gets-all-clear-belgian-tax-row/

18 Sports Direct facing £605,000,000 tax bill, Metro, 27 July 2019, https://metro.co.uk/2019/07/27/sports-direct-facing-605000000-tax-bill-10470839/?ito=cbshare

19 Grant Thornton to quit as Sports Direct auditor over €674m tax bill, Financial Times, 29 July 2019, https://www.ft.com/content/f1c08988-b225-11e9-8cb2-799a3a8cf37b

20 Sports Direct appoints RSM as new auditor, Financial Times, 23 October 2019, https://www.ft.com/content/9d61840a-f59b-11e9-9ef3-eca8fc8f2d65

21 Frasers Group Annual Report 2020, https://www.sportsdirectplc.com/~/media/Files/S/Sports-Direct/annual-report/Annual%20Report%20%20Final%20-%2011092020.pdf

22 UK to leave EU VAT regime 31 Dec 2020, Avalara, 06 October 2020, https://www.avalara.com/vatlive/en/vat-news/uk-to-leave-eu-vat-regime-31-dec-20200.html

23 EU 2021 closing the delivery VAT avoidance loophole, Avalara, 06 July 2020, https://www.avalara.com/vatlive/en/vat-news/eu-2021-closing-the-delivery-vat-avoidance-loophole-.html

24 Sports Direct under scrutiny from EU tax authorities over VAT bills, The Guardian, 02 May 2021, https://www.theguardian.com/business/2021/may/02/sports-direct-in-negotiations-with-eu-tax-authorities-over-vat-bills

UK set to introduce the Amazon tax

1st June 2020 by George Turner

Leaked documents reported in the Financial Times indicate that the UK is to make online marketplaces such as Amazon and eBay liable to collect VAT on behalf of their sellers.

The documents, described as an informal consultation, make clear that the UK is set on the policy, with experts being consulted on design details.

Currently, businesses selling their goods via online marketplaces are liable for their own VAT. This has been a boon to fraudulent traders selling into the UK from overseas. In 2017, a BBC Panorama documentary demonstrated how easy it was for sellers to smuggle goods into the country from China VAT free and sell them to UK customers via online platforms.¹

Although there has been a lot of focus on fraudsters using Amazon and eBay, the two largest marketplaces, there are a number of other marketplaces allowing non-uk businesses to sell into the country via their platforms.

The Treasury estimates that VAT fraud using online marketplaces costs the UK between £1bn-£1.5bn a year, which is in the region of the amount TaxWatch estimates is tax lost to corporate tax avoidance by five of the largest tech giants.

In addition, fraudsters selling into the UK undercut legitimate retailers, leading to job losses and store closures on the high street.

In 2016, the UK government introduced legislation to curb VAT fraud on online market places. This made marketplaces liable for the unpaid VAT bills of businesses using their platform if they refused to remove them after being identified by HMRC as non-compliant. Between 2018 and 2019 HMRC identified 4,650 sellers as being non-compliant.

However, following FOI’s from TaxWatch we found that this approach was only recouping 20% of tax lost.

The government is planning to bring in the new policy in 2020 to coincide with changes to VAT that will be required when the Brexit transition period ends. However, the UK could introduce this change earlier. Germany made online market places responsible for the VAT liabilities of its sellers in 2019.²

The change in the UK government’s approach comes after years of campaigning by organisations such as Retailers Against VAT Abuse Schemes and the Campaign Against VAT Fraud on eBay and Amazon in the UK.

Photo by Bryan Angelo on Unsplash

1 BBC Panorama: The fraud costing the UK £1bn a year, BBC News, 27 November 2017, https://www.bbc.co.uk/news/business-42143849

2 News: German Amazon Marketplace Sellers obligated to Register for VAT, SimplyVAT, 20 December 2018, https://simplyvat.com/news-german-amazon-marketplace-sellers-obligated-to-register-for-vat/

HMRC’s attack on digital Del Boys leaves much to be desired

21st October 2019 by George Turner

Cheap goods, The death of the high street, unparalleled choice and consumer convenience are all things associated with the growth of online shopping. One thing less often talked about is the way in which online marketplaces have facilitated vast amounts of VAT fraud. But despite a recent crackdown, new figures show that HMRC is only managing to recoup about 20% of the amount lost to digital Del Boys.

According to HMRC’s own figures online VAT fraud costs the UK between £1bn and £1.5bn in lost VAT a year. That is more than we estimate corporate tax dodging by Apple, Google, Microsoft, Facebook and Cisco Systems costs the UK.

VAT fraud is a serious issue. VAT is a tax on consumers, so if a company can get out of paying VAT their product instantly appears to be substantially cheaper. This gives fraudsters a sizable advantage over legitimate businesses, causing serious disruption to the lawful economy.

There are a number of ways in which companies can use online platforms to engage in VAT fraud but a key development in recent years has been the way in which online marketplaces make it easier for companies registered overseas to sell into foreign markets.

Today, a company based in China can set up an account on an online marketplace, sell their goods through the marketplace’s website, have their goods stored at the marketplace’s warehouse in the country they are selling into, and have those goods delivered by the marketplace.

Despite all of the physical and logistical infrastructure provided by the marketplace, the duty to collect VAT rests with the seller in China. If that seller chooses not to register for VAT, then it is difficult for HMRC to pursue them on the other side of the world.

To counter this the UK government introduced new legislation in 2016 which in theory allows HMRC to make the marketplace liable for any lost VAT. We say in theory, because a lot has to happen before companies like Amazon have to cough up.

Under the law, HMRC first has to identify non-compliant online sellers. Then the tax agency sends a notice to the online market place where they have an account. The marketplace then has 30 days to remove the seller, or face being landed with their VAT bill.

TaxWatch made a Freedom of Information request to HMRC to see how active they had been in applying this legislation. It appears that HMRC has been very active in finding non-compliant sellers and getting them kicked off the marketplace, but less successful in collecting the missing VAT. Between 2018 and 2019 HMRC identified 4,650 sellers operating on online market places as being non-compliant with the VAT obligations. Since the joint liability legislation was brought in in 2016, HMRC has issued 8,325 notices threatening the marketplaces with joint liability.

In responding to these figures, HMRC told the Mail on Sunday that as a result of the legislation there has been a large increase in VAT registrations from non-EU sellers (up 78,000). HMRC claim that this increase has resulted in £315m being raised in VAT.

HMRC also claim that the notices under the joint liability rules had resulted in £270m in compliance yield. Compliance yield is a somewhat murky figure which HMRC uses to assess the impact of compliance action. The figure includes not just cash collected, but also the future revenue benefit that HMRC estimates they will get when criminals caught and mend their ways.

It all sounds very good. However, when we take into account the fact that HMRC estimates online VAT fraud to be costing between £1-1.5bn a year, a total compliance yield of £585m over three years is a drop in the ocean.

Part of the problem here is that it is so easy to set up shop on an online marketplace that if a non-compliant seller gets found by HMRC it is very easy for them to close down and then re-open the next day with a new account, new name and same products. If they do disappear any VAT they should have claimed is lost, as there is no liability for the marketplace unless they refuse to remove the seller.

In the end, the government is playing a very expensive game of whack-a-mole, when the obvious, simple and clear solution would be to make marketplaces collect the VAT on behalf of sellers. This is the system which has been in place in Germany since the beginning of this year.

After all, the marketplaces already bring those goods to market through their website, store the goods, and deliver the goods all on behalf of sellers. It would hardly be much more to collect VAT on their behalf as well.

This research was featured in the Mail on Sunday.

Photo by Bryan Angelo on Unsplash