In December 2020 the UK Treasury released a Consultation Document in which the so-called “Sharing Economy” is addressed. Following the banking crisis, the UK government actively encouraged the gig economy, partly leading to the expansion of the sharing economy. It seems that the UK Treasury is now finding a means to have them pay their “fair” share of tax.
According to the Treasury, the aim of this call for evidence i.e. this consultation, is to test the UK government’s view on the VAT challenges the Sharing Economy creates. In particular, for the five key Sharing Economy sectors in the UK (collaborative finance, short-term accommodation, passenger transportation, on-demand household services and on-demand professional services).
Individual Contractors vs. Employees
One of the points of attention for the UK Treasury is the fact that often individuals (e.g. self-employed contractors) are selling their services via a platform. The persons selling services via these platforms on an individual level often generate revenue below the £85,000 UK VAT registration threshold as a result of which no VAT will be reported and remitted over these services.
However, if these persons were employees and the service was provided by the platform company itself, consumers would have to pay VAT on the services. Slapping the Sharing Economy with VAT has the potential to shore up many billions in tax revenues that the Treasury believes have been “lost”, as these platforms and service providers have grown rapidly in size compared to traditional providers.
DAC7
As a result, the Consultation Document details what could be the role of digital platforms either with regards to the actual liability to account for VAT on the underlying services, or in relation to the VAT compliance of the actual service providers. The latter appears to resemble to the EU efforts with regard to the DAC7 proposal, which imposes on digital platforms an obligation to collect, verify and exchange the relevant information of persons selling their goods and/ or services through a digital platform. One may say that this is another way of subcontracting the policing of the tax to the online platforms rather than the government having to do it.
In the past, we have seen various attempts by HMRC to obtain information from Digital Platforms relating to the sellers that operate through such platforms. These Digital Platforms however are often not in the position to share such information due to data protection rules. In case the UK would like to impose such an obligation to exchange data to digital platforms, it will be interesting to see how the UK will address the various applicable international data protection rules. We note in this respect that the Consultation document appears to recognize this, as it states that “this hurdle can be resolved by internal legislation and international cooperation”,
DAC6
In this regard its interesting to learn that, now that the UK is no longer part of the EU and the EU DAC6 rules have ceased to apply to the UK, the UK Government has already implemented regulations amending its original DAC6 implementing legislation. These amendments ensure that the legislation continues to operate effectively after Brexit and narrow the scope only to arrangements breaching Hallmark D.
The UK government intends to repeal the legislation during the coming year and replace with legislation to implement the OECD’s MDR.
Based on these changes, it is expected that the compliance burden of UK entities will substantially be reduced.
UK Treasury’s view
However, the Consultation Document appears to have a broader motive, than only addressing the responsibilities of economic operators that offer their services through an online platform.
The document also states that this consultation is part of the UK government’s objective of “ensuring fair competition and a level playing field for all businesses, whether operating in the sharing economy or as a traditional business, regardless of their size and location”. Highlighting research that predicted the value of UK transactions on various platforms, which had been £7bn in 2016, was set to surge to £140bn by 2025. According to the UK Treasury this would equate to a loss of up to £28bn a year.
The consultation document highlighted five sectors it wanted to investigate for action where “no VAT [was] being charged where it might have been in the traditional economy”:
1. ride sharing;
2. accommodation sharing;
3. household services;
4. professional services; and
5. collaborative finance.
The principal issue is that the over 5 million UK self-employed workers who now operate in the mentioned sectors generally do not generate enough income to pass the VAT registration threshold of £85,000. They therefore legally avoid indirect taxes.
To tackle this, the UK Treasury is, as is the EU and the OECD, exploring various way forward to subject the Share Economy service providers to VAT. Hereto various ideas are put forward, among which:
» Implement a buy/sell model whereby the platform through which the services are rendered, becomes the debtor of VAT over the supply towards the user (cf. the new EU and UK e-commerce rules);
» Implement a VAT jointly and severally liability regime for the platform through which the services are rendered for the VAT due over the supplies towards the user (cf. UK marketplace liability rules);
» Change the VAT place of supply rules for the platform through which the services are rendered
Beyond VAT, the Treasury also raises concerns relating to other fields of taxation, particularly with regard to wage tax and income tax.
Conclusion
The consultation is open until 3 March 2021 and after that, the Treasury has given itself 12 weeks to assess the input received. Nonetheless, the debate is on the table in the UK and as these markets continue to grow the desire ensure “fair” taxation will only increase both in the in the EU and the rest of the world.
However, in our view, the consultation is skipping ahead and avoids the primary issue that creates non-taxation, that being the UK’s VAT registration threshold. The threshold was the subject of its own consultation in 2018, the result of which was that HMRC decided not to amend the current law.
Either the current UK VAT registration threshold is a simplification measure, in which case, the non-taxation of the “Sharing Economy” is merely a result, or it is not, and it should be lowered or removed as a policy decision.
It is worth noting that the various rules for e-commerce of goods is a result of the non-compliance (or perceived non-compliance) of traders. However, there is an underlying VAT liability which does not occur where suppliers of services are trading below the VAT registration threshold.
Consequently, we are of the view that the UK Government should decide whether they wish to tax this sector as a whole before considering additional measures to tackle non-compliance. Especially where those measures could trigger the risk of double taxation or the risk that existing
contractual relations are set aside (e.g. by forcing individual contractors into an employment relation with certain online platforms). Therefore, the question should be asked whether VAT is the appropriate tool to have the Sharing Economy pay its fair share. In our view other means should be used here.
Although we do not expect that the UK will implement changes to their Indirect Tax system immediately, we strongly recommend that in-house Tax Policy teams as well as the in-house legal departments keep a close eye on these UK developments. This is both in respect of the potential changes to UK indirect tax law, and also on the potential obligations for online platforms to share data with HMRC, which we suspect may be the first step.
Of course our team is more than willing to participate to your discussion or help you preparing your input to the consultation.
