UK considers VAT changes for sharing economy platforms

Out-Law News | 14 Dec 2020 | 2:57 pm | 3 min. read

Digital platforms operating in the 'sharing economy' could be required to account for VAT under new proposals under consideration in the UK.

The changes, outlined in a call for evidence issued by the UK Treasury, are aimed at digital platforms which facilitate the supply of services between unconnected parties, where those services do not involve any transfers in the ownership of property.

Digital platforms affected would include those for short term accommodation, such as AirBnB, platforms for passenger transport, such as Uber, as well as platforms for collaborative finance, on-demand household services and on-demand professional services.

At present many platforms in the sharing economy involve a digital platform acting as an agent to buy and sell services or introduce underlying service providers to consumers. The underlying service provider, such as a driver or a short-term accommodation provider, acts as the principal provider of the services. This means that it is the service provider who is required to charge VAT, if they are registered for VAT. However, many service providers will not be VAT registered and so will not charge VAT because their turnover will be below the VAT registration threshold, currently £85,000.

In the call for evidence the government has asked if it should make changes which would require sharing economy digital platforms to account for VAT on the supplies that underlying service providers make to consumers.

The revenue of digital platforms from key sharing economy sectors in the UK is forecast to rise to £9 billion in 2025, from an estimated £0.5bn in 2014, growing over 30% a year to 2025, according to the Treasury document.

The government said that, if new laws are not considered, there is a significant risk of "increasing market concentration among platforms operating on a vast scale, with high, often global brand recognition, and operating a high degree of control over underlying service providers, which are nonetheless classified as mere agents for VAT purposes".

The government also considers it likely that in the future individuals and entities trading below the VAT threshold will provide a much greater proportion of services, as measured by both volume and value, than they currently do.

According to the call for evidence, the responsibility for paying VAT could shift to the platform where the platform has a high degree of control over the arrangements. Examples of 'high degree of control' have been cited by the Treasury, such as where the platform dictates the terms of business upon which the underlying service provider is able to engage with the consumer, has control of the authorisation and processing of consumer payments, arbitrates disputes between consumers and underlying service providers and controls or restricts marketing and advertising.

The government has asked in its call for evidence if alternative VAT rules in the sharing economy should apply to all sectors and business models or should only be applied to some, such as just passenger transport.

The government is also looking at measures which would ensure that it collects VAT in respect of the fee which is paid to the platform by the underlying service provider. At present if the platform charges a fee to the underlying service provider and considers that provider to be in business, then this will be treated as a business-to-business supply which will be treated as made where the service provider is established. If the underlying service provider is in the UK, then the UK is the place of supply and that supply is within the scope of UK VAT.

However, if the digital platform is based in another jurisdiction, and has no fixed place of establishment in the UK, then it will not charge UK VAT. Instead the underlying service provider will potentially be expected to account for VAT under the reverse charge. However, if the underlying service provider is not VAT registered because its turnover is below the threshold, there will be no VAT liability even if the overseas-based sharing economy digital platform generates a large amount of revenue from UK-based underlying service providers. This could give digital platforms based outside the UK an unfair competitive advantage in comparison to UK-established platforms and traditional intermediaries, the government said.

One possible solution identified in the call for evidence paper could be to require foreign suppliers to register for and account for VAT on sales to non-VAT-registered business customers.

With hundreds of thousands of underlying service providers active in the sharing economy in the UK, the Treasury document has highlighted the difficulties of identifying those that should be registered for VAT and the need for the platforms to share data. It has asked for views on compliance measures for digital platforms which could apply to both UK-based and offshore based platforms in both the sharing economy and digital platforms which facilitate the supply of goods and electronically supplied services.

The call for evidence closes on 3 March 2021.