A coalition of 18 business groups and tax experts has written to the UK Treasury calling for a formal consultation on online VAT reform.

The letter, coordinated by the British Independent Retailers Association (Bira), highlights concerns that the current VAT marketplace liability rules are being exploited by some overseas sellers on digital platforms, creating an uneven tax and competitive landscape for compliant UK retailers.

The move reflects growing industry focus on ecommerce VAT compliance, VAT loopholes, and digital marketplace tax reform.

Independent analysis cited by the coalition estimates the VAT gap created by these issues at around £700 million annually, underscoring the financial scale of the challenge.

Calls for reform of VAT marketplace liability rules

Under current UK VAT policy, online marketplaces are obliged to collect and remit VAT only for certain sales involving sellers not established in the UK.

The coalition’s letter argues that this carve-out has enabled sellers to misrepresent their status and avoid VAT collection, allowing them to undercut compliant UK retailers on price.

The groups say that extending VAT marketplace liability would assign responsibility to online platforms to ensure VAT is properly applied on all eligible transactions. This, they argue, would help level the playing field for domestic businesses.

The proposal aligns with ongoing discussions in broader tax policy circles about the need to modernise VAT to reflect digital commerce trends and closing online VAT loopholes.

Impact on UK retailers and ecommerce tax compliance

Retailers and trade bodies backing the letter warn that the lack of robust VAT marketplace rules places independent and small UK sellers at a structural disadvantage.

Many of these firms already face high costs of operation, and the coalition says VAT avoidance through online marketplaces exacerbates competitive pressures.

The groups also acknowledge concerns about the administrative impact of reform on very small or unregistered sellers.

They suggest any consultation consider safeguards, such as exempting businesses below the VAT registration threshold, to mitigate undue burdens.

Government consultation urged amid wider tax system scrutiny

The coalition’s call for consultation comes amid broader scrutiny of the UK’s tax framework for the digital economy.

Government bodies such as the Public Accounts Committee and the National Audit Office have previously indicated that VAT fraud and avoidance in online markets are rising and that existing rules may not be fit for purpose.

Industry groups are seeking clarity on next steps, with consultation seen as a vital step in shaping potential changes to VAT policy, ecommerce tax rules, and marketplace accountability.

 How and when the Treasury will respond to the letter remains to be confirmed.