Amazon and eBay could be liable for billions of pounds in unpaid VAT if they fail to properly investigate traders using their sites to escape sales tax, The Social Magazine has learned.
The online marketplaces could be legally required to spot the tax evasion committed by many of their overseas sellers.
UK firms say they are being put out of business by the unfair competition.
Amazon and eBay said they make all users aware of their legal obligations.
“If the scale of the fraud is as big as the anecdotal evidence indicates, then we could be talking about billions of pounds,” said Rita de la Feria, a professor in tax law at Durham University.
She says that under EU law Amazon, eBay and other online marketplaces could be held jointly liable for all unpaid VAT, along with the offending traders, if action was taken against them.
“If you knew that fraud was being committed you are liable,” she added. “If you should have known that fraud was being committed, you are liable as well.
“This principle means that someone like Amazon, someone like eBay can be de facto tax inspectors. Legally they are obliged to police this.”
The latest HM Revenue and Customs (HMRC) figures show that £13.1bn of UK VAT – about 11% – goes unpaid each year. That equates to 40% of the UK’s overall tax gap.
Not all of that missing money is down to online tax evasion, but it could make up a significant proportion.
Paul Miloseski-Reid has been the lead officer on e-commerce for UK Trading Standards for the last nine years. Based on an analysis of thousands of marketplace traders he estimates up to £2bn of VAT is being lost each year.
“The legislation provides a safe harbour defence for intermediaries, up until the point they become aware of that illegality,” he said.
“To keep that defence they need to demonstrate that they acted quickly to stop that illegality in the future. This could be an automatic solution where the VAT number given by the seller is automatically checked against the European database.”
But despite flagging up several seller accounts to eBay in 2011, Mr Miloseski-Reid says the problem persists.
“There’s been assurances given that they will tackle any sellers that are giving false VAT numbers or don’t have their VAT number registered on the system. It’s now 2015 and I still see some of the same problems.
“I would like to see more systematic changes in terms of verifying VAT numbers that make it impossible for businesses that are not properly VAT registered to trade on a marketplace.”
Both eBay and Amazon suggested the onus was on HMRC to find and prosecute tax evaders on their websites.
An eBay spokesman said: “eBay reminds all its users of their need to comply with their legal obligations. If eBay sellers are found to be breaching UK VAT compliance rules, we will cooperate with HMRC in all cases where HMRC provides evidence of underpayment of taxes.”
“Marketplace sellers are independent businesses responsible for complying with their own VAT obligations,” an Amazon spokesman added.
“We do offer tools and information to assist sellers with their compliance, but we don’t have the authority to review their tax affairs. Naturally we cooperate with HMRC as we are required to by law.”
HMRC wants to extend its powers to collect more data on companies and individuals it suspects of tax evasion. It has also said this would apply to “intermediaries”.
“HMRC will intervene to prevent, detect and stop fraud at the earliest stage,” a spokesman added. “We are developing better intelligence around the nature and scale of suspected fraud in this area.”
But struggling UK traders say not enough action is being taken.
Joe Mullins, manager at online retailer Safield Distribution, said the unfair competition from tax-evading sellers had seen their online sales fall sharply, particularly on Amazon.
The firm, which specialises in lighting products, moved into a new warehouse in Romford, Essex, a year ago.
“We thought we’d see a lot more growth this year than we have,” he said.
“If it continues then within the next couple of years it could be a case of having to look elsewhere for other jobs.”
Richard Allen, who successfully pressed for the closure a loophole allowing CDs and DVDs to be sold VAT free by Channel Island companies, is now campaigning for an end to tax abuse on online marketplaces.
“If you have a competitor that’s selling the same product as you with a 20% advantage, you cannot compete.
“So it is actually seriously dangerous for businesses in the UK, to the point where you could be wiped out over one Christmas.”
For the full report listen to today’s PM programme on The Social Magazine Radio 4.