The Institute of Chartered Accountants in England and Wales (ICAEW) has questioned whether the Government’s proposed extension of VAT liability for online marketplaces would effectively tackle non-compliance, arguing that HM Revenue & Customs (HMRC) should retain responsibility for identifying businesses that fail to meet their VAT obligations.
The Government’s consultation, Extending VAT online marketplace liability to combat non-compliance, was published by HM Treasury and HMRC on 23 June 2026. It proposed extending rules introduced in 2021, which made online marketplaces responsible for accounting for VAT on certain sales made by overseas businesses.
The consultation closed on 18 August, with the Government now expected to consider responses before deciding how the rules should be taken forward.
Government proposes wider VAT marketplace liability
The 2021 reforms were introduced to tackle VAT non-compliance by overseas businesses selling to UK consumers through online marketplaces. The Government says those reforms have improved compliance and helped reduce VAT losses, but argues that significant non-compliance remains.
The latest consultation proposes extending the principle to sales made by UK-based businesses through online marketplaces where the goods are in the UK at the point of sale. This would cover a broad range of domestic online sales, including retail goods and restaurant or takeaway food sold through marketplace platforms.
Under the proposed system, the online marketplace rather than the underlying seller would account for the VAT on relevant business-to-consumer sales. The Government says this would strengthen enforcement because marketplaces are already directly involved in facilitating transactions and, in many cases, processing payments.
The Government points to several forms of non-compliance it wants to address. These include overseas businesses falsely presenting themselves as UK-established, UK businesses splitting sales across different marketplaces to remain below the VAT registration threshold, and VAT-registered businesses failing to account properly for VAT or disappearing before paying VAT owed to HMRC.
The problem is particularly significant in the delivered hot food sector. The Government says hundreds of millions of pounds in VAT is estimated to be lost annually through non-compliance in this area.
The consultation also highlights the changing importance of online retail. According to the Government, online sales now account for 28% of all retail sales, while only some marketplace transactions are currently covered by rules designed to ensure VAT compliance.
The policy is intended not only to increase VAT collection but also to create a more level playing field between compliant and non-compliant businesses. The Government has said that revenue raised from improved compliance would be used to support high street businesses through improvements to the business rates system.
Protecting smaller businesses
A major issue for the Government is how to extend marketplace liability without effectively imposing VAT on businesses that are legitimately below the VAT registration threshold.
The current UK VAT registration threshold is £90,000. The Government therefore consulted on two potential mechanisms to protect smaller businesses.
The first is a Minimum Platform Threshold (MPT), under which an online marketplace would only become liable for VAT on sales made by a UK business once that seller’s sales through the individual platform exceeded a specified amount.
The second option is a VAT rate relief for UK businesses below the VAT registration threshold. The Government also invited alternative approaches from respondents.
The proposals would not apply to private individuals selling goods as non-business sellers, such as people selling unwanted second-hand possessions. The Government is also considering how second-hand goods sold by UK businesses should be treated.
For VAT-registered businesses, the proposed mechanism would mean that the marketplace would account for VAT on relevant sales rather than the seller. The seller would continue to recover input VAT in accordance with the normal rules and would remain responsible for VAT on sales made through other channels, such as its own website or physical shop.
ICAEW supports the objective but questions the approach
ICAEW supports the Government’s objective of tackling VAT non-compliance and accepts that non-compliant businesses can gain an unfair competitive advantage over businesses that meet their tax obligations.
However, in its response, ICAEW Representation 57/26, the institute argues that the Government’s proposals may not address the underlying problem effectively.
ICAEW’s central concern is that much of the non-compliance identified by the Government is actually a failure by businesses to comply with existing VAT registration requirements.
That distinction is important. If a business is deliberately splitting its sales between several online marketplaces to remain below the VAT registration threshold, for example, an individual marketplace may have no reliable way of knowing the seller’s total turnover.
ICAEW therefore questions whether marketplaces are the right organisations to determine whether sellers have breached their VAT obligations.
The institute argues that online marketplaces generally do not have visibility of a seller’s complete trading activities. A business could sell through several marketplaces while also operating its own website, selling through social media or trading from physical premises.
As a result, ICAEW says responsibility for determining whether a business has met its VAT obligations should, wherever possible, remain with HMRC, which has access to wider information and enforcement powers.
The institute says the Government should first consider how existing HMRC data, powers and enforcement tools could be used to identify and tackle non-compliance before imposing additional responsibilities on marketplaces.
Why ICAEW rejects the Minimum Platform Threshold
ICAEW is particularly sceptical about the proposed Minimum Platform Threshold.
While the MPT could reduce the impact on smaller sellers, the institute argues that it does not solve the underlying problem because it would measure sales through an individual marketplace rather than a seller’s total turnover across all sales channels.
This could allow precisely the sort of behaviour the Government is trying to prevent. A business could potentially keep sales below the relevant threshold on several marketplaces while having total turnover that should require VAT registration.
The institute also warns that the MPT could create a new population of businesses that become repayment traders, increasing administrative work for HMRC.
ICAEW consequently believes the measure could introduce complexity without adequately addressing deliberate under-registration.
The alternative VAT rate relief option has problems too. ICAEW accepts that relief could reduce the impact on smaller businesses, but argues that it would not actually solve under-registration. There would still need to be an effective way of determining which businesses qualify for the relief.
ICAEW proposes an HMRC-issued identifier
Instead of using turnover or establishment as the principal mechanism for determining the scope of the charge, ICAEW proposes using a credential issued by HMRC.
For VAT-registered businesses, this could be their existing VAT registration number. For businesses below the VAT registration threshold, ICAEW suggests a lightweight HMRC-issued marketplace identifier.
This would provide marketplaces with a clear indication of how a seller should be treated without requiring each platform to determine the seller’s total turnover independently.
Crucially, an HMRC-based system would allow the tax authority to aggregate a seller’s activity across multiple marketplaces. That could make it much harder for businesses to avoid VAT registration simply by spreading sales between platforms.
ICAEW also believes the approach could avoid creating the repayment traders that might result from the MPT proposal and reduce some of the distortions created by the Government’s two options.
The institute acknowledges that its proposal could require greater implementation effort from HMRC than the options currently under consultation. However, it argues that the potential long-term benefits warrant further consideration.
Analysis: who should police VAT compliance?
The ICAEW response highlights a fundamental question about the Government’s strategy: should online marketplaces be responsible for collecting VAT, or should they be required to act on information supplied by HMRC?
There is a clear attraction to the Government’s approach. Marketplaces sit at the centre of online transactions and already possess substantial information about sellers, customers and transactions. Extending liability could therefore provide HMRC with a powerful additional enforcement mechanism without requiring the tax authority to pursue every individual non-compliant seller.
The success of the 2021 reforms provides some support for this principle. The Government itself says the existing rules have been broadly successful in tackling serious non-compliance among overseas businesses.
However, domestic VAT compliance is more complicated. UK businesses can trade through multiple channels, meaning that a marketplace may have only a partial picture of a seller’s activities.
This is the strongest point in ICAEW’s argument. If the underlying problem is that a business has exceeded the VAT registration threshold across its entire trading activity, putting the responsibility on individual marketplaces may leave HMRC dependent on incomplete information.
An HMRC-issued identifier would instead create a clearer division of responsibility. HMRC would determine the seller’s VAT status, while marketplaces would apply the appropriate VAT treatment to transactions made through their platforms.
The approach could also provide a more scalable framework as online commerce continues to develop, particularly as sellers increasingly combine marketplaces, social commerce, their own websites and physical retail.
The Government’s consultation recognises that additional checks could be required from marketplaces, including establishing where a business is based, its turnover, whether it is genuinely operating as a business and whether goods are new or second-hand.
ICAEW’s response effectively questions whether marketplaces should be expected to perform this increasingly complex tax compliance role when HMRC already has the statutory responsibility and wider information needed to make such determinations.
What happens next?
The consultation has now closed, and HMRC and HM Treasury will consider responses before deciding whether and how to proceed.
The outcome will be important for online marketplaces and the businesses that use them. A broader marketplace VAT liability could significantly change how platforms such as online retail and takeaway delivery services administer transactions, verify sellers and account for VAT.
For businesses, the key issue is that the Government is not proposing a change to VAT rates themselves. Instead, it is considering who becomes responsible for accounting for VAT on marketplace transactions.
ICAEW’s intervention suggests that the effectiveness of any new system will ultimately depend on whether it can identify businesses that should be VAT registered across their entire trading activity, rather than simply measuring what they sell through an individual platform.
The institute’s proposed HMRC-issued identifier could therefore offer a more targeted solution: allowing marketplaces to apply VAT rules while leaving the crucial decision about a seller’s VAT status with the tax authority.
The Government’s objective of closing the VAT compliance gap and protecting compliant businesses is broadly supported by ICAEW. The disagreement is over the mechanism. As the Government considers its next steps, the ICAEW response provides a strong argument that better use of HMRC data and enforcement powers may be more effective than transferring responsibility for determining VAT compliance to online marketplaces.