MPs have slammed a "prolonged failure" by HM Revenue and Customs (HMRC) to collect the right amount of VAT from online sellers outside the EU that has cost billions in lost revenue and is "undermining" British businesses.
HMRC estimates that online VAT fraud and error cost between £1 billion and £1.5 billion in lost tax revenue in 2015-16 alone, according to the findings of a National Audit Office (NAO) investigation.
UK trader groups believe the problem is widespread and that some of the biggest online sellers of particular products such as mobile phone accessories are not charging VAT, the study found.
In 2013, the NAO reported that HMRC had not yet produced a comprehensive plan to respond to the emerging threat to the VAT system posed by online trading.
Trader groups claim that online VAT fraud has been a problem since as early as 2009 and has grown significantly worse in the past five years.
HMRC had not yet been able to assess how much of VAT losses were due to lack of awareness, error or deliberate fraud, according to the NAO's study.
Amazon and eBay believed much of the problem was down to a lack of awareness on the part of overseas sellers and were focusing on educating traders and providing tools to hep with VAT reporting and compliance.
Meanwhile, HMRC has decided to focus its compliance efforts inland, including on fulfilment houses, rather than at the border.
However, it could not be certain how many fulfilment houses there are in the UK. It estimated the current number at between 500 and 3,000, the report revealed.
There had been no prosecutions for online VAT fraud to date, but civil operations included 279 investigations of businesses and 373 compliance interventions over the past year.
New legal powers introduced by HMRC in September make online marketplaces potentially jointly liable for non-payment of VAT when they have been informed of an issue with a seller.
VAT rules require all traders based outside the EU selling goods online to customers in the UK to charge VAT if their goods are already in the UK at the point of sale.
The sellers should also be registered with HMRC and have to submit regular VAT returns.
Public Accounts Committee chairwomen Meg Hillier urged HMRC to "finally step up and act to confront this growing problem".
She said: "HMRC's prolonged failure to collect the right amount of VAT from online sellers outside the EU resulted in lost tax revenue of up to £1.5 billion in 2015-16.
"This is a double whammy for taxpayers. Overseas sellers who avoid VAT undercut the prices charged by small, law abiding British businesses hitting British jobs. Add to that the billions in lost tax which could be spent on health, education and other vital services and no one wins except the VAT avoiders.
"I am very concerned that this undermines the competitiveness of British businesses at a time, post-Brexit, when the UK's economy needs all the support it can get to compete outside the EU."