Country-specific updates: UK

VAT and the Sharing Economy

The UK government has published a call for evidence on the “VAT challenges of the sharing economy” and the issues it identifies for the UK tax base. Any digital platform which facilitates the supply of services between two or more unconnected parties, where those services do not involve any transfers in the ownership of tangible or intangible property would be in scope. Examples given are individuals hiring out their labour or renting out their assets, in return for consideration (whether monetary or non-monetary). The government sees potential tax base erosion in three related categories:

• Business to consumer and consumer to consumer: individuals and entities trading below the VAT threshold will provide a much greater proportion of services, by volume and value, than they currently do. In this context, the government is considering rules which would override the agent-principal legal relationship and shift the responsibility for paying VAT to the platform where the platform has a high degree of control over the arrangements (such as dictating 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).
• Business to business cross-border services: if an offshore digital platform supplies services to UK business customers, it does not have to account for VAT but if the underlying service provider is a small operator trading below the VAT registration threshold, then it is not required to account for VAT under the reverse charge. A possible solution discussed in the call for evidence would involve a requirement for foreign suppliers to register for and account for VAT on sales to non-VAT-registered business customers.
• Promoting compliance: ensuring compliance with VAT rules by the underlying service providers and digital platforms, especially those based offshore. Acknowledging that compliance issues affect direct tax as well, the government asks what would be a proportionate and effective set of obligations, sanctions and administrative easements that the UK tax authority could use to encourage compliance among digital platforms and underlying service providers.

DLA Piper comment: The sharing economy has been one of the items debated by the EU VAT Expert Group several times ultimately resulting in a coordinated approach (VEG Paper No 090). With the end of the Brexit transition period, it remains to be seen if the UK will follow the VAT positions held by the EU in any way. Responses to the call for evidence can be submitted until 3 March 2021.

Consultation on VAT and value shifting

The UK tax authority has launched a consultation on a proposed revision of the rules for apportioning consideration between supplies with mixed liabilities in a single transaction to counter VAT savings, and what the tax authority sees as consequential competitive advantage, by some businesses (such as in retail) apportioning more consideration to non-standard rated items. Changes are therefore proposed to ‘prevent inappropriate value shifting’ that will apply to all businesses selling bundled supplies.

New legislation will introduce mandatory valuation methods. Cost-based apportionments will not be permitted where items sold in bundles are also sold separately, and therefore their individual sale prices are known. Estimates of market value will not be permitted at all and use of cost will be mandatory for items which are not sold separately and therefore their actual market value is not known.

DLA Piper comment: The topic of bundled (composite) versus separate supplies has been subject to debate for years. It is established EU case law (e.g., Levob, C-41/04) that where a transaction comprises a bundle of elements and acts, regard must be had to all the circumstances in which the transaction in question takes place in order to determine, first, whether there are two or more distinct supplies or one single supply and, secondly, whether, in the latter case, that single supply is to be regarded as a supply of goods or a supply of services. Even with such EU case law, UK courts routinely have to rule on the matter (e.g., the recent Marks & Spencer case, UKUT 182). Therefore the consultation is a welcome development and further clarity on the matter is expected in due course. The public consultation will end on 30 March 2021.