Online marketplaces: The VAT loophole that lets dodgy sellers undercut you

Business founders shouldn't have to compete with sellers who dodge VAT.

A new industry coalition, whose members include Enterprise Nation, is calling on the Treasury to consult on a straightforward fix.

How the VAT loophole works

If you sell on a marketplace, you know how quickly customers compare prices. A small gap can make the difference between winning the sale and someone scrolling past you.

Right now, the VAT rules for online marketplaces have a hole in them that some sellers exploit.

The current system makes platforms collect VAT from overseas sellers, but not from UK-established sellers.

Bad actors claim they're established in the UK when they're not. They use that lie to avoid VAT entirely, which means they can undercut those UK retailers that are meeting the rules by up to 20%.

Why this matters to your business

When sellers dodge VAT, they can price below the honest majority who follow the rules. That distorts competition, and rewards rule-breaking rather than good products and service.

It also creates mess. A system that relies on unclear responsibility leads to more disputes and more admin.

Most importantly, it weakens confidence in marketplaces as a channel for growing businesses. If you feel the playing field is tilted, you invest less time and money into it.

This is why we've been pushing for a clean fix, and why the latest industry letter matters.

VIDEO: VAT essentials every business needs to know

Chartered accountant Sean Hookins takes you through the basics of VAT registration requirements for small businesses, breaking down the VAT essentials every start-up needs to know:

What the industry coalition is asking for

A new letter led by the British Independent Retailers Association (Bira) has been sent to the Exchequer Secretary to the Treasury.

It's backed by 18 business organisations and tax experts, including Enterprise Nation.

The request is clear – bring forward a formal consultation on extending VAT liability rules for online marketplaces.

In practice, that means considering a system where online marketplaces are responsible for keeping to VAT rules across the board.

That, in turn, should equal things out for UK businesses and help protect tax revenues.

The letter makes the case plainly. Online marketplaces offer "an easy and low-risk way" for small businesses to reach new customers.

But as retail becomes more competitive and spread across a number of different channels, even the smallest advantage can determine whether a business survives or fails.

The coalition warns that gaps are being exploited and that this is "simply not sustainable" for UK firms trying to run legitimate businesses while facing a historically high cost of doing business.

It also points to the government's informal review last year, which considered extending the rules as a way of stopping the abuse.

The revenue case

Independent analysis cited in the Bira update suggests this VAT loophole could be costing the Exchequer around £700 million a year.

In a blog post from November 2025, we noted that 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.

The wider context matters too. The government plans to raise £7.5 billion a year by 2029–2030 through tighter tax rules.

Targeted, low-friction fixes matter. A reform that simplifies enforcement and focuses activity where it's most effective should be attractive.

What Enterprise Nation has called for

Enterprise Nation has been calling for a clean, deliverable fix to VAT fraud on online marketplaces.

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

That single change would close the loophole, make enforcement easier and create fairer competition. By removing the current "establishment" test, the main channel for VAT fraud would fall away.

It would also let HMRC focus on a handful of major platforms rather than millions of individual sellers. That makes the process simpler and should mean more firms comply.

This is why we've joined the coalition letter organised by Bira. It pushes the same direction.

It calls for consultation on extending the rules so that the requirement to comply with VAT rules sits with the online platforms.

What you should do now

If you sell on online marketplaces, keep a simple record of where your sales come from and how price competition is affecting you, so you can describe the problem clearly if a consultation opens.

If you're below the VAT threshold, stay aware of your turnover and when you might cross £90,000.

If you're VAT-registered, double-check that your VAT processes are solid, including how you account for marketplace sales, so you're not exposed if rules change.

If you trade on several channels, be clear on your pricing approach across those channels, so you're not forced into reactive discounting by under-priced competition.

Watch for government engagement on the coalition's request for a consultation, and be ready to share your experience as a compliant seller.

People also read

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