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VAT Split payment mechanism

09 November 2018

HMRC has published a summary of responses to ongoing consultation on implementing a VAT split payment mechanism. This is one of a number of proposals that aim to combat loss of VAT on sales of goods by businesses selling through online platforms.

What is the VAT split payment mechanism?

Under the split payments proposal, one party in the payment chain would be required to pay the VAT on each sale directly to HMRC and pay only the balance (i.e. the net price) to the vendor. It has not yet been decided which party, but it could be the merchant acquirer.

Having reviewed responses, the Government remains enthusiastic about the potential of a split payments model. It believes this approach could be effective in reducing VAT losses from cross border e-commerce and has potential to transform the way VAT is collected in the future. This VAT split payments model could eventually be used for all businesses.

When and how will the Government introduce the VAT split payment mechanism?

At this stage, the Government acknowledges concerns about the practical complexities of the project and the costs involved. The Government says it regards split payment as a long-term solution rather than something it will implement in the near future. HMRC and the Treasury now invite interested parties to join a formal industry Working Group to develop the project further.

Payment businesses, currently facing other regulatory and structural changes, including from the Revised Payment Service Directive, will no doubt welcome HMRC’s plans to develop the project at a slow pace. As will vendors, who may be caught up in other major changes to their VAT systems from Brexit and/or Making Tax Digital.

Meanwhile, payment providers, online marketplaces and online vendors should take note of the consultation and consider participating in HMRC’s stakeholder process.