Technology should not count against platforms in consideration of VAT obligations, says expert

Out-Law Analysis | 15 Jul 2014 | 2:24 pm | 4 min. read

OPINION: Delivering services to consumers using digital channels should not trigger tax obligations for businesses that do not exist where the services are delivered via other channels.

The UK platforms industry faces a potential administrative headache if the services they provide to investors are caught by new EU VAT rules. The new rules, if they are said to apply to platform services, could require platforms to account for varying VAT rates in 28 different countries.

The application of the rules to platforms would penalise the use of technology that helps improve accessibility and reduce costs for businesses and consumers in the investment market. It may also mean that digital services provided by banks and insurance companies will be subject to increased scrutiny to determine whether those services should also fall subject to the new VAT rules.

Earlier this month Deloitte warned that investment platforms could be swept up in significant VAT changes taking effect on 1 January 2015. Under the rule changes, the supply of broadcasting, telecommunications and electronically supplied services by businesses to consumers will be subject to VAT in the country where the individual lives.

Because investment platforms are not currently taxed in a uniform manner across the EU, those businesses could face a significant additional compliance burden if the services they provide are classed as 'electronically supplied services'.

Under current EU law, supplies of services to individuals or non-business recipients are generally subject to VAT in the country where the supplier is located. However, the increasing size of the business to consumer (B2C) digital economy has led to a rethink of these rules, amid fears that the present law is leading to distortion of competition and an un-level playing field. In particular this has caused concern about the sale of e-books, music downloads and other digital  content.

In such areas, some suppliers have established themselves in countries such as Luxembourg and sold e-books to UK consumers at a VAT rate of 3%. By contrast suppliers located in the UK and selling to UK recipients have been required to charge UK VAT at 20%. Understandably this has led to a growing group of suppliers crying foul over this legal disparity.

Applying the VAT rules for 'electronically supplied services' on a point of consumption basis could have significant implications for platforms. Deloitte said that platforms could be classed as 'electronically supplied services', with the effect being that a UK platform supplier could be required to charge VAT on any clients living in France, for example. Currently, the UK generally exempts from VAT the services supplied by investment platforms whereas in France such services are usually subject to VAT.

Affected businesses have to think hard about how to comply with the new law. Essentially there are two options available to businesses. A business may register for VAT in each EU country in which it supplies relevant services to consumers. Local VAT may then be charged and accounted for normally. The downside to this is that administering 28 VAT registrations and tax returns is a compliance burden.

As a simplification measure, however, businesses may opt to use the VAT Mini One Stop Shop (VAT MOSS) regime which has been set up in the UK by HM Revenue and Customs (HMRC) to facilitate the broader EU measure. The simplification allows businesses to register for VAT in only one EU country and submit a single, combined, VAT return. Under the scheme, the centralised data is sent to each individual EU country in which there are declared sales and the relevant VAT payment is also remitted in accordance with the local applicable rate.

Under either model, the business is left with problems of ensuring that it is able to determine the location of its customers and charge local VAT accordingly.

Deloitte's warning has raised the prospect that the new 'point of consumption' regime for VAT in the EU may not be limited to e-commerce platforms but may also apply in a financial services context.

Whether this is correct or not depends upon how platform services are viewed. In its legislation and guidance the EU views electronically supplied services as being those delivered over the internet or electronic network, the nature of which means that they are largely automated and involve minimal human intervention. Further, it states that in the absence of information technology those services would be impossible to provide.

Specific examples which are subject to such treatment include: digitised products; internet service packages, but not the bare provision of access to the internet; and services automatically generated from a computer via the internet in response to data input by the recipient. Specifically excluded are the services of lawyers and financial consultants who advise via email; advertising services; and telephone helpdesk services.

In terms of whether or not to apply VAT to platform services, HMRC recently consulted with the UK industry to understand the nature of the services supplied. HMRC's conclusion was that platforms supply services, online, which are designed to transact, administer and safeguard financial investments. In particular they noted that platforms undertake activities such as: acting as nominee for investors; acting as distributor for investment product providers and executing orders received from investors. Platforms may be accessed by the investor directly or only via an adviser or other regulated intermediary.

It would seem that at the heart of these services are the financial transactions themselves, including specialised functions such as nominee services and execution. The platform is a way for the investor, or his adviser, to better access the underlying financial services. However, the platform is merely a channel to access the services desired by the investor.

Considering the guidance provided by the EU, it cannot be said that such services would be impossible to provide in the absence of information technology. Financial advice, trade execution and nominee services have historically been supplied without the internet or electronic networks. In this context IT merely adds a convenience of access and availability which is consistent with the 'everything and everywhere' mindset of the digital generation.

To allow the channel by which these services are provided to determine the treatment of the services themselves could lead to an unwelcome level of uncertainty. In particular where would one draw the line to identify the tipping point at which delivery method determines character? For instance would mobile banking apps and facilities fall to be treated as electronically supplied services? If that could be the case then why not online insurance brokers? Taxing on the basis of the delivery method rather than the substance of services will introduce significant uncertainty.

Treatment of platforms as electronically supplied services is likely to increase cost for consumers and business both in terms of growing the compliance burden and more frequent imposition of VAT. For this reason, it is expected to be strongly resisted by the UK platform industry, especially when such a possibility emerges as an unwelcome visitor at the 11th hour.

Darren Mellor-Clark is a VAT and indirect tax expert at Pinsent Masons, the law firm behind