If you’re a tax authority faced with loss of revenue due to value-added tax (VAT) fraud and error in online transactions, here’s an appealing idea: Why not impose an obligation on one of the parties involved in effecting an electronic transaction to extract VAT at the time of purchase and then deposit it into the government’s account? Given the sophistication of today’s payment technologies, a bank or service provider in the transaction chain could easily split the VAT from the payment amount and submit it automatically.
That’s the principle behind split payment, a collection method the United Kingdom is hoping will help to reduce an annual loss of VAT on online purchases estimated at somewhere between £1 billion and £1.5 billion (figures for 2015-16). Her Majesty’s Revenue and Customs (HMRC), the U.K.’s tax collection body, is taking a page from the playbook of some Latin American countries where split payment regimes are already in effect. A Vertex whitepaper—Minding the VAT Gap: Split Payment and Real-Time Taxation Insights from Latin America co-authored by Vertex Tax Research Manager – Brazil Ana Maciel and Vertex Tax Research Analyst Enrique Troiani — looks at the U.K.’s plans and the Latin American influence.
HMRC has issued a couple of consultation documents on the topic. The latest, published in March, seeks input on the technologies that could be used to collect VAT. Tax leaders should keep an eye on the U.K. move and similar initiatives in other countries, for at least two reasons:
- Split payment adoption will likely spread. Tax jurisdictions around the world are struggling with VAT gaps – shortfalls between what they expect to collect and what they actually collect. As such, tax leaders should expect more countries to consider split payment and other alternatives to traditional VAT collection.
- It’s part of a larger movement toward real-time taxation. The technologies required for split payment also support wider areas of tax digitalisation, which some jurisdictions are actively pursuing; Danny Vermeiren, director of VAT in the Vertex Chief Tax Office, described one example of this activity last November. Real-time taxation requirements would impose new demands on tax functions and their tax technologies.
While Britain is making cautious progress, a cluster of Latin American nations are unquestionably the reigning world champions of split payment. I’ll cover their strategies in an upcoming blog.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.