There has been much news in the press regarding Uber and their VAT position. Reports are of a £1bn provision for UK taxes and action by HMRC to recover the VAT considered due. It is not known if this amount includes any provision for penalties. This article is intended to provide a view of some of the developments in the taxi electronic platform (taxi apps) sector from a VAT perspective.
The market
Uber have a reputation for not accounting for VAT on their taxi activities by basing their platform in the Netherlands. Others have long been operating at a commercial (20%) disadvantage which impacts not only shareholder value but also competitiveness – pricing and driver recruitment. Perhaps worse, they are forced to follow the ‘tax efficient’ model and provide app services from overseas. Some new operators in the taxi app sector are making representations in their advertisements that they pay local taxes – presumably UK – unlike some of their competitors.
There is also an issue for drivers. Some have inadvertently breached the VAT registration threshold and been required to register for UK VAT. The consequence of this is that the income previously below the VAT registration threshold is now deemed inclusive of VAT – creating a 20% cost, only marginally mitigated by some VAT recovery.
I am aware HMRC had created a team including VAT, Corporate Tax and Employee Taxes specialists to better understand the sector. It appears the fact finding phase has finished and we may be in an enforcement cycle.
The issue
The position of the app provider is they are providing app services to independent taxi drivers. They introduce the passenger to the driver and charge a commission to the driver for that introduction. There is no supply to the passenger by the app provider under this model.
If the booking platform is based outside the UK (the Netherlands in respect of Uber) then no VAT is accounted for on the commission by the app provider. The obligation passes to the driver who is required to account for VAT under the general place of supply rules, as this is a B2B transaction for VAT purposes. The theory is the driver accounts for the output tax due (instead of the supplier) and recovers that VAT as input tax.
This would work perfectly for the authorities if the taxi driver was VAT registered. The driver would apply the reverse charge to the app services which would be neutral and account for VAT on the full price of the passenger transport. However, most (say 98%) of taxi drivers are not VAT registered as they trade below the VAT registration threshold. Therefore the reverse charge does not occur.
The consequence of this is that the Treasury is losing VAT receipts. As the taxi driver is operating below the VAT registration threshold the Treasury in effect lose the VAT due on the commission where the app provider is based outside of the UK. This amounts to a considerable loss to the Treasury.
What is the app provider actually supplying?
There has been increased awareness of this model being used to reduce VAT liabilities. Other jurisdictions (e.g. Denmark) have effectively stopped Uber from trading on realisation of the tax loss and introducing effective tax collection measures. At the same time, litigation in respect of the gig economy has direct bearing on the capacity in which the taxi app company acts. The Court of Appeal confirmed Uber is operating a private hire business. One of the Judges is the Master of the Rolls. The decision has been appealed to the Supreme Court.
In a separate case, the European Court of Justice confirmed that Uber is a taxi company for regulatory purposes. This was a case taken by Barcelona’s Asociación Profesional Elite Taxi. The opinion of the Advocate General provides a compelling summary of the issues arising from the Uber model and what they are actually providing. The decision has many findings of fact that are relevant from a tax perspective.
Neither the employee tax nor regulatory position is absolutely conclusive for VAT purposes. You can be one thing for one legal purpose and another thing for another legal purpose. However there is a backdrop of increased calls to arms in respect of avoidance. UK courts also try to find the ‘right’ answer (let he who is without merit beware the courts being a guiding principle). You might therefore consider Uber are in something of a perfect storm.
An irony?
If Uber had accounted for VAT on their commission it might be that HMRC would have been satisfied with that VAT take. However, with the perceived avoidance and the developments in the courts on related issues it has brought the entire contractual and supply relationship into question. This could result in VAT being due on 100% of the fare and not the 20% commission.
Other implications
Uber may have created a risk for the rest of the sector – who may already account for UK VAT on their commission – the entire fare becoming liable to VAT. This will fundamentally change commercial models. Given the developments in gig economy cases this may already seem inevitable.
Final thoughts
HMRC’s purpose is to collect revenue. There is a prize of meaningful additional revenue for HMRC. There is also an opportunity for HMRC to evidence high profile action in respect of overseas corporates considered to operate unfairly and reduce or avoid their fair tax contribution. This will help their impression with the Public Accounts Committee.
Given the implications, the better position for the sector might be to try and reach an enforceable position that VAT is always due on the commission charged. This removes distortion of competition and most likely reflects the true commercial arrangements. Otherwise electronic platform apps might find themselves with a significantly increased VAT bill for the future. Worst case scenario: HMRC might consider the past and, if that is the case, penalties may be in issue.
The matter brings together different legal jurisdictions, public policy, the effectiveness of tax administration and attitudes to tax planning. Another issue created by digital trading that the authorities are trying to address.
By Sean Glancy, Partner – Indirect Taxes, UHY Hacker Young LLP