A common criticism of policymakers is that they conjure policies out of thin air, without understanding the intricacies of the markets in which they are to operate. In the call for evidence launched just before Christmas 2020 in relation to VAT and the sharing economy, the government has sought to address this risk through early engagement.

So, what is this call for evidence (the consultation) about and what can it tell us about the policies that may well follow? First, it has been issued by the Treasury, implying that this is a matter of policy strategy (a change in policy) rather than policy maintenance (adjusting the system to deliver current policy, the purview of HMRC). Also, although the consultation is careful to ask questions rather than promote answers, it’s clear that there are some changes to come.

The consultation focuses on “any digital platform that facilitates the supply of services between two or more unconnected parties, where those services do not involve any transfers in the ownership of … property”. In essence, it looks at where a consumer uses a digital platform to access the services of an underlying service provider (USP).

The consultation argues that the sharing economy results in “challenges to the VAT framework” and notes that it “not only creates challenges for VAT but impacts upon a range of different taxes”. It positions these challenges within the context of an ongoing body of work that has been undertaken both by the UK and international bodies, including in response to Action 1 of the Base Erosion and Profit Shifting Action Plan of the Organisation for Economic Cooperation and Development. This consultation, however, is specific – it’s not focused on the wider implications of digital platforms (such as those addressed by the March 2018 HMRC consultation on the role of digital platforms) but only on those related to the sharing economy.

The consultation analyses the sharing economy in five sectors: collaborative finance; short-term accommodation; passenger transportation; on-demand household services; and on-demand professional services. While it does not distinguish between the five sectors in its questions, it is perhaps notable that the example given in the appendix shows the VAT loss from accommodation and passenger transportation.

The big issue

The premise of the consultation is that digital platforms render inappropriate past choices inherent in the VAT regime in relation to reducing VAT administration. In essence, a digital platform provides the basis for independent operators (the USPs) to gain the benefits of significant scale and yet still fall within exemptions that were designed to reduce the burden for small businesses – on the assumption that relief for those small businesses would not undermine VAT receipts. The chapter on the growth of the sharing economy is set to convince the reader that this cannot continue, as failure to act will put those traditional businesses at a competitive disadvantage due to their requirement to charge VAT. 

There is some merit to this argument. Additionally, the UK’s relatively high VAT threshold makes this concern particularly important in the UK compared with other countries. While the consultation doesn’t suggest reducing the VAT registration threshold, policymakers may well want to evaluate this as the consultation process moves forward. The consultation, however, hints in another direction, in that it seeks to identify a classification of digital platforms, upon which any new requirement could be imposed. The platforms potentially under scrutiny would be those that have control of how businesses working via the platform contract. Examples of control include: terms of engagement; authorisation and processing of consumer payments; and marketing and advertising of the USPs.

Three areas of particular concern

In providing a framework for reviewing the ‘VAT challenges’, the consultation identifies three areas. These are: business to consumer (B2C) and consumer to consumer (C2C) transactions; business to business (B2B) transactions; and compliance more generally. The challenges identified basically revolve around how transactions are falling (legitimately) outside the VAT net – this is not a consultation about evasion or non-reporting of income, but about how the VAT regime of today does not work in this new digital environment.

• The first area relates to the VAT that is not charged on the fees received by the USPs (since they are below the registration threshold) but would be if the turnovers of the USPs were aggregated. The consultation argues that this situation cannot be left to continue as “otherwise [there is] a significant risk that we will witness 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”. In terms of addressing the question, and slightly diverting from the true nature of a call for evidence, it notes that the long-established definition of ‘agent’ is an area that would be difficult to overturn and hence points to the new classification of some types of digital platform providers.
• The second area again relates to size, this time focused on fees charged by the digital platform to the USP. Where those fees are charged to a UK USP by a foreign digital platform, the fees would be subject to VAT under the reverse charge mechanism. This would work fine for a VAT-registered USP, but the reverse charge mechanism doesn’t apply where the USP is below the VAT threshold. In this situation, the foreign digital platform would not need to charge UK VAT and the USP would not need to reverse charge, giving rise to a further shortfall in VAT.
• The final area is in relation to reinforcing compliance. The consultation points out that “there are several hundreds of thousands … possibly millions” of USPs active in the sharing economy in the UK and that taking enforcement action “could prove to be very resource-intensive and expensive for HMRC”. While acknowledging that this is an issue of digital platforms more generally (rather than just in relation to the sharing economy), the consultation points to the need to have provisions that can be enforced on all digital platforms, whether in the UK or overseas.

Conclusion

In considering the consultation as a whole, it’s good that the Treasury is asking questions that will help understand the commercial nature of how these platforms see themselves and what their strategies are for growth. One would hope that the next step will be a full consultation with policy proposals, as there are some fundamental questions to be addressed. The issues are similar to others of the past – we saw betting exchanges rise up to challenge traditional bookmakers – and yet the solutions of the past may not be the best precedent upon which to build the future regime. Clearly the ‘VAT challenges’ are there, but it is rare that the first options considered are the best. There may well be answers that span both taxation and regulation, something that will take further evaluation. We also need to recognise that the current system outside of digital platforms is not perfect and that changes in the broad system may well remove the pressure in this area.

Those working in this area should keep a keen eye on what follows this call for evidence, not least because of the greater flexibility that the UK has to design its VAT regime following Brexit. The tax system is generally designed by looking in the rear-view mirror, but changes in today’s environment need to be swifter, more informed and flexible. For that reason, this call for evidence is a good step forward – but what matters most is what follows next.

About the author

Chris Sanger is Head of Tax Policy at EY, a former policy adviser at HM Treasury, founder of the Tax Faculty’s Tax Policy Committee and Chair of the Tax Professionals Forum. The views expressed here are his own, and do not necessarily represent those of the mentioned organisations