The rapid growth of online marketplaces has brought increased scrutiny from the government over VAT compliance. HM Revenue & Customs (HMRC) believes that tens of thousands of businesses selling through these platforms are failing to meet their VAT obligations, resulting in a significant loss of tax revenue each year.
This is not a new area of focus. In 2021, the rules were strengthened to make online marketplaces liable for accounting for VAT on certain sales made by overseas sellers through their platforms. Now, the government is looking to go a step further.
What is changing?
The consultation proposes that:
- Online marketplaces become responsible for accounting for VAT on qualifying sales of goods made by UK businesses to consumers through their platforms, rather than the underlying seller;
- A deemed supply mechanism applies, under which a zero-rated supply is treated as taking place between the seller and the marketplace, with the marketplace then accounting for VAT on the final sale; and
- The changes cover domestic sales of goods such as retail items and takeaway food, representing a significant expansion of marketplace liability.
Importantly, the government has committed that any additional revenue would be used to fund improvements to the business rates system for pubs, restaurants, hotels and other high street businesses. The proposal therefore aims to strengthen VAT compliance in online marketplaces while supporting compliant bricks-and-mortar retailers.
Two proposals to reduce the impact on smaller businesses
Recognising that these changes could affect businesses that are not currently required to register for VAT, the government is consulting on two options:
- A Minimum Platform Threshold (MPT), under which online marketplaces would only become liable for accounting for VAT on sales made by UK businesses whose sales on an individual platform exceed a specified threshold.
- A VAT rate relief for UK businesses with taxable turnover below the VAT registration threshold.
Minimum Platform Threshold
The government’s preferred approach is an MPT of £90,000, aligning with the VAT registration threshold. However, it recognises this may leave some non-compliance outside the scope of the rules and is therefore also considering a lower threshold.
The MPT would not affect existing VAT registration requirements. Businesses would still need to register for VAT once their total taxable turnover exceeds the statutory threshold, regardless of their platform sales.
Who is outside scope?
The proposals apply to business-to-consumer sales through online marketplaces and would not affect individuals selling personal items such as second-hand goods or collectables.
The treatment of second-hand goods sold by UK businesses remains under review.
Impact on marketplaces and businesses
The operational impact of the proposals will vary depending on the type of online marketplace.
Platforms that already account for VAT under the 2021 rules for overseas sellers may require relatively limited changes, whereas marketplaces that primarily facilitate sales by UK businesses – such as takeaway food delivery platforms – are likely to face more significant adjustments to their systems and processes.
- Online marketplaces would need procedures to determine when they are responsible for accounting for VAT. This is likely to include verifying whether a seller is established in the UK, whether their sales exceed any applicable MPT, whether they are acting in the course of a business, and whether goods are new or second-hand, depending on the final scope of the rules.
- For businesses selling through these platforms, impacts will depend on their VAT position. Some may benefit from reduced administration if VAT is handled by the marketplace, but cashflow changes are likely as VAT will no longer be held by the seller. Businesses using the VAT Flat Rate Scheme may be particularly affected.
Businesses below the VAT registration threshold
Under the broadest proposals, some businesses below the £90,000 threshold could have VAT applied to their sales. This may prompt some to register voluntarily in order to recover input VAT and protect margins.
How M+A Partners can help
The consultation is still at an early stage, meaning the proposals may change before any new rules are introduced. However, businesses that sell through online marketplaces should be aware of the potential implications and begin considering how the changes could affect their VAT obligations and cashflow.
Whether you operate an online marketplace or sell through one, our VAT specialists can help you understand what the proposals could mean for your business.
If you would like to discuss how these proposals could affect your business, please get in touch with your usual M+A Partners’ contact or our expert below.
The consultation is open until 18 August 2026.
