Uber is a test case for taxing digital platforms
Online marketplaces are using VAT advantage to crush bricks and mortar competitors
Ride-hailing app Uber revealed last week that it is talking to HM Revenue & Customs over a potentially nasty UK tax issue.
As accounts for its London subsidiary, filed last week, highlighted, the group “is involved in an ongoing dialog [sic] with HMRC, which is seeking to classify the Uber Group as a transportation provider”.
The liability stems from a 2018 landmark ruling that established Uber drivers were “workers” and not self-employed. If Uber fails to convince the UK Supreme Court to overturn the decision, the company could owe 20 per cent value added tax on all bookings.
The company said in its filing that the tax would be applied both “retroactively and prospectively”. Hence, presumably, “the dialogue” with HMRC — even though officially HMRC is not encouraged to cut retrospective sweetheart deals with corporations.
The tax and legal campaigner Jolyon Maugham has long argued that the ambiguity over the company’s employer status has led to unpaid VAT worth as much as £1.1bn. His non-profit, the Good Law Project, launched a judicial review proceeding against HMRC this May seeking to force the tax authority to evaluate whether more could be done to stem the losses.
But the Uber disclosure indicates HMRC is finally taking action. This is definitely a step forward. But it is now vitally important that the tax authority does not offer to negotiate a settlement. That would signal it is acceptable for companies to use uncertainties about legal status to gain big advantages against VAT-paying competitors. It would also reinforce the notion that there is one rule for disrupter corporations and another for everyone else.
Uber declined to comment on any discussions with HMRC but said it will always fulfil its tax obligations in any country in which it operates.
However, Uber is not the only digital platform provider to have found ways to avoid paying taxes through clever structuring. Up to now, public attention has focused on the use of offshore domiciles by companies such as Apple and Google to cut corporation tax. But that overlooks the role VAT avoidance has played in empowering platforms to destroy the high street.
Richard Allen, head of the campaign group Retailers Against VAT Abuse Schemes, has long argued that VAT avoidance is one of the most important factors giving online marketplaces such as Amazon and eBay an edge over more traditional bricks and mortar suppliers.
As with Uber, legal status comes into it. Marketplaces are generally not considered to be direct suppliers of goods. Instead, they are treated as facilitators of transactions between consumers and suppliers. That pushes responsibility for paying VAT on to contractors or merchants, who have much lower revenues and often don’t hit the minimum threshold for paying VAT.
Even when they do, suppliers are often based offshore or in territories where it is hard to pursue legal cases. So tax authorities end up relying on the voluntary payment of sales tax or VAT.
Many online market place suppliers further benefit from exemptions for imports of low-value goods. A rule aimed at reducing the administrative workload for customs agents has ended up facilitating a high volume tax-exempt trade that competes with onshore companies.
An OECD report highlighted how the practices put “unfair competitive pressure on domestic businesses that are increasingly incapable of competing against the continuously rising volumes of [VAT or goods and services tax]-free online sales of goods”. This, in turn, hurts domestic employment and direct tax revenue, it noted.
The problem for the tax authorities, though, remains the complexity and cost of tracking VAT abuses across many countries. Additional checks and searches could also put a damper on global commercial activity. That’s why the easiest way to re-establish a level playing field is to make platforms legally responsible for VAT, either directly, or by holding them accountable through loss of licenses if their suppliers are caught underpaying. This is why the Uber case is worth watching.