Previously, these marketplaces only had to collect VAT on behalf of overseas sellers and not domestic ones. Some overseas sellers then exploited this gap to avoid paying the tax by registering as U.K. based companies.
The government plans to reinvest the savings made from this policy into the high street through reductions to business rates.
The government launched an eight-week consultation into extending VAT online marketplace liability in June, after mounting pressure from retailers.
Amazon estimated that up to £3.2 billion of sales across online retailers in the U.K. are made by sellers avoiding VAT collection — costing the Treasury hundreds of millions each year in lost revenue.
The move to close the loophole brings Britain closer to approaches adopted in Switzerland. The European Commission is also due to review its marketplace VAT collection rules next year.
Monica Ariño, director of U.K. public policy at Amazon, said: “This is an important step towards closing a loophole exploited by bad actors and creating a level playing field for the thousands of UK small businesses that sell in our store. We look forward to continuing to work with HM Treasury and HMRC to make the changes effective, practical and fair.”
This story has been updated