Online marketplaces like Amazon and eBay are profiting from fraud by sellers who dodge the VAT they should charge on sales in the UK, a British parliamentary report has said.
The "unfair and illegal" practice allows sellers based outside the EU to undercut British retailers by 20%, hitting sales hard and forcing many to cut staff or even shut down, said the House of Commons Public Accounts Committee (PAC).
Customs authorities have been "too cautious" in pursuing fraudsters, said the committee, which said the loss to taxpayers may be much higher than the "out-of-date and flawed" HM Customs and Excise estimate of £1-£1.5bn.
The problem is growing fast as online purchases increased from 2% of retail sales in 2006 to 14.5% in 2016. And the committee warned it will "only get more complicated" due to uncertainty over customs arrangements when Britain leaves the EU.
Under tax laws, traders based outside the EU selling goods to customers in the UK must charge VAT if the items are present in the UK at the time of sale.
But many do not charge the 20% levy, even though the goods are stored in up to 3,000 warehouses known as "fulfilment houses" dotted around the UK.
Both Amazon and eBay told the committee that they took action to remove "bad actors" from their sites.
But the report found that it was "bewildering that these big companies have taken such little action to date", adding: "Amazon and eBay, amongst other online marketplaces, continue to profit from fraudulent activities taking place on their sites".
The cross-party committee called for "much more urgency" from HM Revenue and Customs, which "has not named and shamed non-compliant traders and so far has not prosecuted a single seller for committing online VAT fraud".
The PAC called on HMRC to put in place by March a co-operation agreement with online marketplaces, including a requirement for them to ensure that a valid VAT number is showing for any non-EU trader selling goods to UK consumers, where the items are in the UK.
Committee chair Meg Hillier said: "Online VAT fraud is hugely damaging yet, as online sales continue to grow, the response of HMRC and the marketplaces where fraudsters operate has been dismal.
"HMRC needs to be far tougher in protecting the interests of British businesses and taxpayers. As a priority it must inject more urgency into enforcement action. But it should also push the case for further new powers.
"Online marketplaces tell us they are committed to removing 'bad actors', yet that sentiment rings hollow when those same marketplaces continue to profit from the actions of rogue traders.
"They can and should do more to drive them out and we will expect online marketplaces to co-operate fully with HMRC in tackling non-compliance."
An eBay spokesman said: "We want a fair marketplace for all our buyers and sellers.
"That's why we have been working together with HMRC - and going above and beyond their requirements - to continue to ensure that our site is the best possible place to do business."
An Amazon spokesman said: "We are reviewing the committee's recommendations and support efforts to ensure businesses and individuals selling across all marketplaces are VAT compliant.
"We offer extensive information, training and tools to assist sellers in their VAT obligations, and we work closely with HMRC on this matter sharing all requested data on non-EU sellers and promptly removing any seller they inform us is not VAT compliant."
An HMRC spokesman said: "The UK has led the way in holding online marketplaces jointly liable for VAT evaded overseas.
"We introduced tough new rules last year allowing us to hold online marketplaces liable for unpaid VAT by overseas sellers and since then we have seen a ten-fold rise in the number of sellers registering for VAT.
"The new reforms will secure an extra £875 million in tax to help pay for vital public services."
A spokesman for the Retailers Against VAT Abuse Schemes (RAVAS) campaign said the report should be "an alarm call for HMRC and online retail platforms".
"The current level of abuse is not only too high but it is also preventable," said the RAVAS spokesman.
"Until UK retailers are free of abusive VAT-free competition and proper deterrents are in place - including where necessary criminal prosecution - RAVAS regards the approach of the tax authorities as weak and ineffective, a fact that it believes is proven by the findings of the committee."