UK government consults on extending VAT liability rules on online marketplaces

On 23 June, the government published a consultation on extending VAT online marketplace liability to combat non-compliance as part of its Tax Update 2026, a package of tax and customs measures to reduce administrative burdens and improve certainty. 

Under the current online marketplace (OMP) VAT liability rules, OMPs are required to account for VAT on sales to UK consumers that they facilitate on behalf of overseas businesses. The proposal would extend these rules to cover sales by UK-based businesses where the goods are situated in the UK at the point of sale.

Non-business sellers would fall outside the scope of the proposed rules. There would therefore be no impact on, for example, individuals selling second-hand clothes or other unwanted goods.

Background 

In 2021, the previous government introduced reforms to strengthen VAT compliance in the OMP sector by making OMPs liable to account for VAT on certain sales they facilitate on behalf of overseas businesses.  While these reforms have been broadly successful, HMRC has identified persistent VAT non-compliance from both domestic and overseas businesses. The consultation identifies three main patterns of such non-compliance:

• overseas businesses masquerading as UK-established and failing to account for the correct VAT; 
• UK businesses spreading sales across multiple OMPs to remain below the VAT registration threshold; and 
• UK businesses that register for VAT and reclaim input tax but then either under-account for the output tax due or dissolve their businesses before remitting the VAT to HMRC.

The consultation identifies the online food delivery sector as a particularly persistent area of VAT non-compliance. 

The proposal

The proposal, if implemented, would transfer VAT accounting responsibility from UK VAT-registered businesses making business-to-consumer sales via an OMP, to the relevant OMP. Under the proposal, for the purposes of accounting, when a business makes a sale through an OMP, a deemed zero-rated supply would take place between the seller and the OMP. The OMP would then be responsible for charging VAT at the relevant rate and accounting for it on its own VAT return.

The proposal would also have a cash flow impact on businesses that currently account for VAT on their sales, as they would no longer retain the VAT collected prior to remitting it to HMRC; instead, the VAT would be collected directly by the OMP. In addition, businesses would need to adapt their existing VAT accounting practices to accommodate the zero-rating of supplies to OMPs.

Given the particular impact on non-VAT-registered UK businesses, which would be unable to recover input VAT, two mitigation options are proposed: 

• Minimum platform threshold (MPT): The lead proposal is an MPT set at £90,000 (the current VAT registration threshold). This would bring into scope only UK businesses with total sales on an individual platform exceeding the VAT registration threshold. However, an MPT set at this level would fail to address a significant proportion of VAT non-compliance, since businesses could illegitimately disaggregate their sales across multiple accounts on the same platform. The government is therefore also seeking views on a lower MPT as a secondary option.
• VAT rate relief: A form of VAT rate relief could be made available to UK-based businesses below the VAT registration threshold, to help offset the VAT charged by the OMP on their sales.  However, this option may not address the risk of overseas businesses masquerading as UK-based to gain a competitive advantage, and could create further avenues for non-compliance.

A further consequence of the proposal relates to the Second-hand Margin Scheme, under which VAT-registered UK businesses selling second-hand goods may currently account for VAT only on the profit margin realised on the sale. As the scheme is not available to OMPs, UK businesses selling second-hand goods through an OMP would see the full rate of VAT applied to those sales. The government is therefore considering whether to exclude second-hand goods sold by VAT-registered UK businesses from the scope of the proposed rules or not to allow businesses on OMPs to take advantage of the Second-hand Margin Scheme.

Impact of proposals on OMPs

OMPs should take a number of practical steps now. First, they should review their current VAT processes in light of the proposed changes: specifically, the implications of the proposals are likely to differ according to whether the OMP already administers the existing VAT liability in respect of goods sold by overseas businesses, or would be newly brought into the extended liability because the businesses on their platform are situated entirely in the UK.

While OMPs must already undertake due diligence on sellers on their platforms and report this information to HMRC (under the UK Platform Operators (Due Diligence and Reporting Requirements) Regulations 2023), this information broadly captures only basic details of the seller (such as their name, address and tax identification number). Enhanced due diligence would be required if the proposals are implemented as the OMP would need to know:

• whether a sale is made in furtherance of a business (as sellers who are not acting in the course of a business would fall outside the scope of the proposed rules);
• the turnover of the selling business (as this will be relevant for the purposes of any MPT); and
• whether the goods being sold are second-hand or new (given the potential impact on the Second-hand Margin Scheme, should it continue to be available to VAT-registered UK businesses following the consultation).

Next steps  

The consultation closes on 18 August 2026, after which the government will publish a summary of responses setting out the next steps. If the government decides to proceed with the proposals, HMRC will subsequently publish a technical consultation on draft legislation. 

The overall timeline will accordingly depend on the outcome of the consultation process, the feedback received on the workability of the proposals, and future fiscal events (such as a budget or spring statement).

Osborne Clarke comment

These proposals represent a significant extension of OMP VAT liability and will potentially have wide operational and compliance implications for OMPs and the UK businesses that use them. 

Platforms with no prior experience of the OMP liability regime face the steepest adjustment, while those already administering VAT for overseas sellers will need to adapt existing infrastructure to a domestic context. OMPs themselves may need to make significant investment in systems and compliance infrastructure, particularly those which facilitate food delivery services that may have historically dealt only with domestic sellers.

OMPs should begin auditing their seller verification processes and system capabilities against these potential requirements in anticipation of the government taking forward the proposals set out in the consultation.

The consultation presents an important opportunity for OMPs to influence the design and implementation of the proposed rules. 

If you would like to discuss the implications of these proposals further, please get in touch with any of the contacts below.