A company based outside of the EU can sell a product to a UK customer without charging 20 percent VAT; but, if that product happens to be on UK land when the sale takes place, they are obligated to charge VAT. Sites like Amazon and eBay have blurred the lines somewhat, however. Third-party sellers based outside of the EU sell to UK customers through those platforms, but the products themselves are typically stashed in warehouses (aka fulfilment centres), which is why they arrive with you the next morning.
The committee is accusing Amazon, eBay and others of being complicit in fraud by turning a blind eye to third-party sellers that aren't charging VAT, even though the products they're selling are sitting on the shelves of UK warehouses when the transactions take place. This scenario obviously gives the sellers an illegal, competitive advantage over businesses based in the UK and others that play by the rules. On top of that, the government is missing out on all that sweet tax revenue, which HM Revenue & Customs (HMRC) estimated was between £1 and £1.5 billion in 2015-16 -- "depriving public services of funds at a time of austerity," as the committee puts it.
Amazon and eBay are also accused of taking a lax approach to self-policing these third-party sellers despite claiming it's within their interests to maintain their reputations. The committee asserts their checking procedures aren't robust or proactive enough -- "it is bewildering to us that these big companies have taken such little action to date." It's also said online marketplaces don't cooperate properly with HMRC and share enough data to make identifying non-compliant traders easier. In further damaging claims: "The Committee conducted some mystery shopping which showed how easy it was to buy something, have it delivered the next day from a UK base and not pay VAT. We were even offered a partial refund when we repeatedly requested a VAT invoice."
That's not to say the Public Accounts Committee thinks HMRC is ill-equipped to deal with the problem. In fact, the report saddles almost as much blame on HMRC for failing to tackle VAT fraud. According to the committee, HMRC underestimates the impact of online VAT fraud, and doesn't do nearly enough to tackle it in the face of repeated warnings from the committee itself and several campaign groups. It's alleged that "HMRC waited until the introduction of new measures under the Finance Act 2016 before it attempted to hold online marketplaces responsible." And yet, HMRC has done little since, with no prosecutions thus far or even a namecheck of a non-compliant trader. In statements sent to The Guardian, Amazon, eBay and HMRC basically said they were all doing their best, etc.
In no uncertain terms, the Public Accounts Committee has recommended HMRC basically step up and do its job, part of which should involve setting up proper cooperating agreements with marketplaces like Amazon and eBay, potentially via new legislation if necessary, as well as chasing unpaid VAT from bygone sales. Furthermore, the committee recommends HMRC gets its ducks in a row posthaste. "With Brexit and the uncertainty over trading and customs this issue is only going to get more complicated."