Closing the VAT loophole on marketplaces: A deep dive into one of our core Budget asks

In our Budget submission to HM Treasury, we called for a clean, deliverable fix to VAT fraud on online marketplaces.

This blog sets out the case in full and explains what it means for small business founders.

Current rules make platforms collect VAT from overseas sellers, but not from UK-established sellers.

Bad actors claim to be UK-based to dodge the rules. This undercuts those firms that are keeping to the rules and costs the Exchequer hundreds of millions a year.

What has gone wrong

• Partial liability creates a weak point: Since 2021, platforms are liable for VAT on goods sold by overseas sellers, including consignments under £135. UK-based sellers remain outside scope and account for VAT themselves, which some exploit by mis-declaring where they're established.

• Verification is hard in practice: HMRC's June 2025 guidance set out checks that platforms should perform to verify where a seller is established. At scale, this process is complex and error-prone.

• There is a documented enforcement gap: In February 2025, the Public Accounts Committee concluded that HMRC has under-estimated VAT evasion in online retail and flagged weak co-ordination with Companies House and the Insolvency Service.

• The financial stakes are high: Government plans to raise £7.5 billion a year by 2029–2030 through tighter tax-compliance measures, so targeted, low-friction fixes matter.

Our recommendation

Our proposal is straightforward – extend the deemed reseller regime to all marketplace sellers, so platforms collect and remit VAT on every UK business-to-consumer goods sale they facilitate.

This single change would close a long-standing loophole, simplify enforcement and create fairer competition for small firms.

By removing the current "establishment" test, the main channel for VAT fraud would disappear.

HMRC could then focus on a handful of major platforms rather than millions of individual sellers. This would make the process less complicated and ensure more firms are complying.

It would also end the unfair advantage enjoyed by sellers who evade VAT, allowing compliant UK small businesses to compete on price and quality rather than loopholes.

This approach has industry backing. Amazon called for extending the rules to all sellers, arguing it would close the loophole, ease burdens on honest traders and raise up to £700 million a year for the Exchequer.

Safeguards for the smallest sellers

To protect the smallest firms, the reform should be paired with a simple disapplication regime linked to the VAT threshold.

Sellers below the current £90,000 threshold would remain outside VAT. Once a seller's marketplace turnover passes that point, the platform would automatically begin collecting and remitting VAT on their behalf.

This keeps the spirit of the threshold intact while sparing marketplaces from having to verify where each seller is established.

Why this matters to founders

For founders, the benefits are clear.

Closing the loophole restores fair competition by making sure everyone plays by the same rules. It also removes confusion at checkout, as clear platform liability means fewer disputes and less admin.

Most importantly, it strengthens confidence in omnichannel sales. Marketplaces are central to growth for many small firms.

In one government survey, 54% of retailers reported using eBay, and among those selling on several different platforms, 70% use eBay. A simpler VAT system would make those routes to customers even stronger.

The British Independent Retailers Association has welcomed Amazon's stance and urged the government to go further by removing the £135 duty-free threshold for low-value imports, which also distorts competition.

International direction of travel

Internationally, major economies are moving toward broader platform liability. In Switzerland, since 1 January 2025, online marketplaces are treated as deemed suppliers for goods sales they facilitate.

That makes them responsible for collecting VAT, rather than the individual sellers themselves.

The EU's VAT in the Digital Age (ViDA) package adds a deemed supplier regime for platforms facilitating short-term accommodation and passenger transport.

What it could raise

Industry analysis shared with the government suggests that extending the deemed reseller regime in full could deliver substantial gains.

The modelling indicates around £1.25 billion a year in additional VAT receipts and could bring an estimated £3.2 billion of currently non-compliant sales into the system.

Beyond closing the gap, it would also restore an estimated £2.7 billion in fair-trade opportunities to UK sellers by removing under-priced competition from traders that aren't complying.

For the smallest firms, there would be little impact.

Micro-sellers operating under the proposed disapplication regime are expected to spend only about four hours a year monitoring their VAT status, a light administrative load compared with the benefits of a simpler, fairer marketplace.

The bottom line

Extending platform VAT liability to all marketplace sellers is a straightforward reform with a high impact.

It protects compliant small firms, strengthens the tax base and reduces complexity across one of the most important sales channels for UK entrepreneurs.

See our latest media and policy impact

We give small businesses a voice – in the media and in Westminster. See our latest press releases, policy insights and how we're championing small firms. Visit the media and policy centre