UK Budget 2026: Proposed Extension of Marketplace VAT Liability to Domestic Sellers Raises Concerns for Small Retailers

The UK Government is considering extending marketplace VAT collection rules to UK-established sellers, with an announcement expected in the October 28, 2026 Budget. The reform will reduce VAT fraud and increase tax revenue, but could affect small retailers, marketplace pricing and e-commerce compliance.

The United Kingdom is considering extending its existing Deemed Supplier VAT regime to domestic sellers operating through online marketplaces, potentially making platforms responsible for collecting and remitting VAT on a wider range of consumer sales.

The measure is expected to feature in the October 28, 2026 Budget, with reports suggesting that the reform could generate up to £1 billion annually in additional VAT revenue. However, the final scope, implementation date and treatment of small businesses have not yet been officially confirmed.

The proposal follows a government consultation launched by HM Revenue & Customs (HMRC) and HM Treasury on June 23, 2026, which closed on August 18, 2026.

Although the reform aims to address VAT fraud and unfair competition, it raises practical questions for small retailers, online marketplaces and e-commerce software providers.

Under the existing rules introduced in January 2021, online marketplaces are generally responsible for accounting for VAT on certain sales by overseas sellers, including goods located in the UK at the point of sale.

UK-established sellers normally remain responsible for their own VAT obligations and can benefit from the existing £90,000 VAT registration threshold.

The proposed extension would transfer VAT liability for additional domestic marketplace transactions from individual sellers to the platforms facilitating those sales.

Amazon has publicly supported this approach, arguing that the existing distinction between domestic and overseas sellers creates opportunities for VAT fraud.

Extending marketplace liability could reduce reliance on seller establishment checks and make VAT collection more consistent.

However, the government has not confirmed that every domestic marketplace transaction will automatically become subject to VAT.

Its consultation specifically considers protections for businesses operating below the VAT registration threshold.

One of the main concerns involves small businesses whose annual taxable turnover remains below £90,000.

These businesses can currently operate without VAT registration, provided they meet the relevant conditions.

If marketplaces had to account for VAT on their sales without suitable relief, small retailers could face reduced margins or have to increase their selling prices.

For businesses operating with narrow margins, this could affect profitability.

Recognising this risk, the government consulted on two possible safeguards:

• Introducing a minimum platform sales threshold below which marketplaces would not become liable for VAT on a domestic seller's transactions.
• Introducing VAT rate relief for businesses operating below the normal VAT registration threshold.

These options remain policy proposals rather than confirmed rules.

The consultation also makes clear that private individuals selling goods outside a business activity would not be covered by the proposed extension.

Therefore, the reform should not currently be interpreted as automatically requiring every small marketplace seller to register for VAT.

Another concern involves retailers operating through marketplaces, independent webshops and physical stores.

Under a broader Deemed Supplier model, the VAT treatment of a transaction could depend on the channel through which the sale occurs.

For Point-of-Sale (POS), e-commerce and ERP software providers, the practical challenge would be ensuring that sales information correctly identifies which party is responsible for accounting for VAT.

Impact on affected businesses

The proposal directly concerns online marketplaces, domestic e-commerce retailers, businesses using multiple sales channels and software providers supporting marketplace transactions.

Marketplace operators could become responsible for determining VAT rates, calculating tax, processing adjustments and accounting for VAT on a much broader range of transactions.

Retailers may need to reconsider pricing, margins and transaction reconciliation where marketplace VAT treatment differs from direct sales.

For software providers, potential implementation work includes transaction classification, VAT liability identification, refunds, vouchers and integration between marketplace systems and retailers' accounting software.

The reform could also affect restaurant and takeaway businesses using online delivery platforms, which are included within the scope of the government's consultation.

However, no new technical requirements or implementation deadlines have yet been adopted.

What should businesses do?

Retailers should review the proportion of sales conducted through online marketplaces and identify how a transfer of VAT liability could affect pricing, accounting and reconciliation.

Small businesses should pay particular attention to the final treatment of sellers operating below the £90,000 VAT threshold.

Marketplace operators and software providers should assess whether their existing systems can distinguish platform-accounted VAT from seller-accounted VAT and support the necessary reporting processes.

From a retail compliance perspective, extending marketplace VAT liability could reduce fraud and unfair competition, but its success will depend on protecting legitimate small businesses from disproportionate financial consequences.

The principal issue is not simply who collects VAT, but how the reform treats smaller sellers and transactions across different retail channels.

The October 28 Budget may provide further policy direction, although detailed legislation and implementation arrangements could follow separately.

Until then, businesses should treat the extension as a proposal rather than an existing VAT obligation.

The main source for this article is the VATCalc article regarding the UK budget - Source

Ivana Picajkić, Medior Legal Consultant at Fiscal Solutions

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