Is your business involved in online trading?  If the answer is yes, you can expect more attention from HMRC.  That’s because VAT fraud and tax losses stemming from online businesses are likely to become an even higher priority for HMRC.

This week has seen HMRC castigated by the National Audit Office. An NAO report says HMRC is yet to produce a credible plan to tackle the threat of VAT losses from the sector.

Why does this matter?  It’s the scale of the problem that’s troubling for HMRC and the Government. Online trading is set to become an even greater part of the UK economy. In 2010, for example,  the level of uncollected taxes from the sector was already in excess of £30bn with nearly £10bn of that VAT. In other words 10% of the total tax take and a third of the whole tax gap. Online trading poses particular problems from HMRC which says its already taken steps to tackle the problem. But it seems it’s not enough according to opposition MPs who believe HMRC has been too slow to get to grips with the digital economy.

HMRC has of course taken some steps to increase the tax take from online traders.  These include closing VAT loopholes but the NAO believes HMRC’s operational response has been weak. It seems then from the NAOs point of view this is a substantive problem rather than one of appearance.

You may be surprised to learn that there are no automatic real-time checks on VAT returns as a whole. This plus the size of the 2010 tax gap reveals, according to some, urgent action is needed.

It would seem MPS and HMRC have different views on where HMRC should concentrate its efforts.  If you look at recent initiatives HMRC has been running campaigns aimed at encouraging online traders to put their tax affairs in order and chasing those who owe it money. And in fact it points to its success in the last 10 years in reducing trader fraud by two-thirds.

Here’s the conundrum facing HMRC. On the one hand it’s supposed to cut costs and at the same time reduce the amount of tax avoidance. And it’s supposed to be improving customer experience. That seems to be the key thing. While the NAO says progress has been made on improving the tax take, improving customer service levels has much further to go.

So what can we expect in the years ahead? Looking forward, HMRC says it will put structural changes in place giving it a platform for tackling VAT fraud amongst digital businesses. Readers of this blog will no doubt say their VAT affairs are in order. Just as well. A VAT or tax investigation is the last thing a business needs.