UK Online Marketplace VAT Liability: Proposed Extension to Domestic Sales – Compliance Guide

Introduction

The UK government has launched a consultation on extending online marketplace (OMP) VAT liability rules to cover sales by UK-based businesses when goods are in the UK at the point of sale. Currently, OMPs are liable for VAT on certain sales by overseas sellers—a rule introduced in 2021 to improve compliance. However, non-compliance persists among both overseas and UK businesses, distorting competition between online and high street retailers.

This guide explains the current rules, the proposed extension, what it means for UK sellers and platforms, and actionable compliance steps. The consultation closes on 18 August 2026, so businesses should prepare now.

Current Rules: OMP VAT Liability for Overseas Sellers

Since 2021, online marketplaces have been liable for VAT on certain sales by overseas sellers where goods are located outside the UK at the point of sale. This rule was designed to level the playing field and improve VAT compliance, but non-compliance remains an issue.

• What’s covered: Sales by non-UK sellers of goods valued at £135 or less, where the goods are outside the UK at the point of sale.
• Marketplace obligation: The OMP must account for VAT on these sales, rather than the overseas seller.
• Reason for the rule: Non-UK sellers often fail to register and charge UK VAT, creating an unfair advantage over UK-based businesses.

Proposed Changes: Extending Liability to UK Domestic Sales

The government is now consulting on extending OMP VAT liability to cover sales by UK-based businesses when goods are in the UK at the point of sale. This would apply to a wide range of goods, including retail items and takeaway food.

Key features of the proposal

• Scope: OMPs would be liable for VAT on domestic sales of goods by UK sellers, where the goods are in the UK at the point of sale.
• Policy intent: To tackle persistent non-compliance among UK businesses and ensure fair competition with high street retailers.
• Consultation details: The government is seeking views on design features, including how to minimise the impact on businesses not required to register for VAT, and evidence on administrative, commercial, and operational impacts.

The consultation is part of broader tax and customs reforms announced by the UK government, including accelerating the scrapping of customs duty relief on low-value imports (goods ≤£135) to October 2028—six months earlier than planned. These measures aim to create a fairer, simpler, and digital-first tax system.

Impact on UK Sellers and Online Marketplaces

For UK sellers

• VAT registration: Many small sellers who currently operate below the VAT registration threshold (£90,000 as of 2025/26) may need to consider registering if the marketplace shifts the VAT liability to them via contractual terms.
• Pricing adjustments: If the marketplace charges VAT on sales, sellers may need to adjust their pricing to remain competitive.
• Administrative burden: Sellers may need to provide accurate VAT details to marketplaces and ensure their invoicing systems are compliant.

For online marketplaces (OMPs)

• Increased compliance costs: OMPs will need to update systems to identify and verify VAT registration status of UK sellers, and account for VAT on domestic sales.
• Liability risk: OMPs could become liable for unpaid VAT if sellers provide incorrect information or fail to register.
• Operational changes: Platforms may need to adjust their fee structures, payment flows, and reporting processes.

Compliance Steps for Sellers and Platforms

Step 1: Verify VAT registration status

OMPs should verify the VAT registration status of all UK sellers. For sellers not registered, the platform may need to decide whether to require registration or accept liability. Sellers should ensure their VAT registration details are up to date on all platforms.

Step 2: Update invoicing and accounting systems

Both sellers and platforms should review their invoicing systems to ensure they can handle VAT correctly on domestic sales. This includes generating VAT invoices, recording transactions, and reporting to HMRC. Sellers using accounting software should check for updates that reflect the new rules.

Step 3: Adjust pricing and fee structures

Sellers may need to adjust their prices to account for VAT if the marketplace charges it. Platforms should review their fee structures to ensure they are not inadvertently absorbing VAT costs or creating double taxation.

Step 4: Monitor regulatory changes

The consultation is ongoing, and the final rules may differ from the proposal. Use tools like AIGovHub's tax compliance tools to monitor HMRC announcements and consultation outcomes. AIGovHub provides real-time regulatory alerts and practical guidance to help businesses stay compliant.

Step 5: Engage with the consultation

Businesses affected by the proposed changes should consider submitting responses to the consultation before the 18 August 2026 deadline. This is an opportunity to shape the final rules and highlight any unintended consequences for small businesses or specific sectors.

Common Pitfalls

• Assuming it won't apply to you: Even small sellers below the VAT threshold may be impacted if platforms require registration to avoid liability.
• Ignoring the consultation: Failing to respond may result in rules that are burdensome or impractical for your business model.
• Not updating systems early: Waiting until the final rules are published could lead to rushed implementations and compliance gaps.

Frequently Asked Questions

When will the new rules come into effect?

The consultation closes on 18 August 2026. The government will then analyse responses and publish draft legislation. The exact effective date is not yet known, but businesses should prepare for implementation in 2027 or later.

Will small sellers below the VAT threshold be exempt?

The consultation seeks views on minimising the impact on businesses not required to register for VAT. It is possible that an exemption or de minimis threshold will be included, but this is not confirmed.

What goods are covered?

The proposal covers domestic sales of goods, including retail items and takeaway food. Services are not included in this consultation.

How will this affect cross-border sales?

The current rules for non-UK sellers remain in place. The proposed extension only applies to UK-based sellers selling goods located in the UK at the point of sale.

Next Steps: Prepare for Change with AIGovHub

The extension of OMP VAT liability to domestic sales represents a significant shift in UK VAT compliance. To stay ahead, use AIGovHub's tax compliance tools to track regulatory changes, assess your obligations, and implement the right processes. Our platform provides:

• Real-time alerts on UK tax reforms and consultations
• Practical guides for VAT compliance
• Vendor marketplace for tax software and advisory services

Explore our UK VAT compliance guide for more detailed information. For the latest updates on this consultation and other tax changes, visit AIGovHub's tax compliance hub.

This content is for informational purposes only and does not constitute legal advice.