The consultation, which ran between March and June, sought to gauge industry views on how a system for VAT split payment could work, in order to address estimated losses of between £1bn and £1.5bn annually from cross-border online sales, with particular enforcement difficulties for businesses based overseas.

It followed on from earlier consultations looking at the issues in general terms.  In this latest one, HMRC proposed two conceptual models that focused on the possible role of merchant acquirers, payment service providers and issuing banks in VAT collection, along with three potential simplifications to determine the amount of VAT to be split from a transaction.

Acknowledging that any split payment mechanism would be a radical departure from the way VAT is collected today, HMRC’s response to the consultation has conceded that more work needs to be done to identify a solution that is workable.

While respondents agreed implementing a split payment system is technologically possible, splitting a payment and ensuring compliance with the UK’s current VAT rules will be complex. For any split payment model to work it needs to be both simple for businesses to develop the technology and to comply with it in terms of applying its rules to every transaction in scope.

Cashflow was raised as an important issue particularly for small and medium businesses, but all payment types should be captured by any split payment mechanism for it to be effective and to avoid driving unintended behavioural distortions among consumers.

Developing the technology to carry out split payment would involve cost to the payments industry, and depending on the costs it raises questions of whether such a mechanism would be proportionate; there is also a question of responsibilities for the cost of implementing and maintaining a split payment model.

The payments industry is undergoing a period of structural and regulatory change which  limits businesses’ capacity in the short to medium-term to implement new government proposals, while there were concerns raised over the future competitiveness of the UK payments industry if split payment were to be implemented unilaterally.

Some respondents thought the EU’s 2021 VAT e-commerce package, would solve non-compliance by deeming online marketplaces liable for their overseas sellers’ VAT thereby reducing the need for a split payment system, arguing that if the government is to continue to pursue a split payment policy, a common multi-jurisdictional approach would be preferable in terms of cost and complexity.

In answer to the feedback, the response stated: ‘The government views split payment as a potential long-term solution, but accepts it would take both HMRC and industry time to develop and implement successfully.’

Now HMRC and the Treasury are to set up a formal industry working group to facilitate discussions about how this would work. The group’s objectives are to develop customer journeys for how split payment could work in different scenarios, particularly for new and evolving payment types; identify potential pilot opportunities to test the concept; explore short and medium-term measures which could facilitate potential longer-term implementation of a split payment system; for example, how data can be utilised for splitting; and to develop a roadmap for how split payment could be implemented.

The aim is to design an effective system, including appropriate remuneration models, which payments businesses can operate with minimum disruption to their core business functions. HMRC and HM Treasury will  also engage financial regulators such as the Bank of England and the Financial Conduct Authority to explore how existing and planned reforms to regulations might be harnessed to create an enforcement environment conducive to split payment in the long-term.

Anyone who  would like a progress update or thinks their organisation may have relevant expertise, such as financial services solution architects and/or payments industry experts, that could be beneficial to the working group is invited to  contact indirecttax.projectteam@hmrc.gsi.gov.uk by 5 December.

Consultation outcome Alternative method of VAT collection – split payment released 7 November 2018

Report by Pat Sweet