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Uber on collision course with HMRC over £1bn VAT dispute

Neil Warren wonders why it has taken so long for the nature of supplies made by Uber to be considered by HMRC.

14th Oct 2019
Independent VAT Consultant
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The first time I used Uber, I wondered about the VAT issues of the arrangement. Is Uber supplying transport or just software services linking customers to taxi drivers? For readers who live in areas not served by this online service (and there are many), it works as follows:

  • You open an account with Uber on a smartphone app and at the press of a button you can order a taxi to come to the spot where you are standing. Self-employed drivers have the choice of accepting or rejecting a booking, and if they accept the customer is then told their name and vehicle details, how long they will take to arrive and also the average mark out of five they have been given by previous customers.
  • At the end of the journey, no cash changes hand with the driver. The cost of the journey is confirmed by Uber in an email to the customer and payment is taken by debit or credit card.

The VAT challenges

You have probably guessed what the VAT problem is here: a problem which has left HMRC licking its lips about a potential windfall of £1bn for retrospective tax. This was declared as a contingent liability in the accounts of Uber Group Inc but with a note included in the accounts of Uber London Ltd to 31 December 2018.

The note also confirms that Uber will be “defending itself vigorously” against the claim, which runs along similar lines to the age-old ‘principal vs agent’ issue:

  • Principal: Is Uber making a UK supply of transport services ie output tax is due on the full fare paid by the customer?
  • Agent: Is the self-employed driver supplying transport services instead, which means that output tax will not be payable in 99.9% of cases because the driver’s annual sales will almost certainly be less than the £85,000 registration threshold. In this case, Uber is just supplying software or agency services to the drivers on a commission basis.  

History of case law

There have been countless tribunal cases on the agent vs principal issue, and this challenge has become even more important in recent times following the introduction of online platforms such as Uber. The two key issues are usually as follows:

  • Contracts: The nature of the contracts agreed between the various parties and what VAT outcomes this suggests.
  • Customer perception: Which business do customers consider they are dealing with when they part with their hard-earned cash?

Why such a long delay?

My initial confusion was why Uber’s VAT problem has taken so long to come to the fore: after all, it started trading in the UK in 2012, so why wasn’t the VAT dilemma raised by HMRC and dealt with straight away? Has HMRC been a bit slow in coming to the party? After all, it’s had a lot of other challenges, including massive staff cuts.

The answer could be because of the recent suggestion that Uber drivers are employees rather than self-employed. This creates a change to the VAT position because an employee cannot be in business making taxable supplies.

The note in Uber’s accounts also includes a comment about challenges with “claims and litigation related to the company’s classification of drivers as independent contractors.” A double problem, so to speak.

Learning points

It is probably a good time to consider whether you have clients involved in three-party deals where the VAT treatment could be questioned by HMRC. The challenge is to establish who is supplying what and to whom.

As well as taxi firms, website businesses and beauty salons, disputes can also arise with shows and concerts eg is the production company, venue or event promoter responsible for output tax on ticket sales? It can often be a nightmare sorting that one out and as always, nailing this early often avoids the worst cases.

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Replies (27)

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By memyself-eye
15th Oct 2019 10:12

It took HMRC so long because they've been putting all their talent..cough- into MTD!
This will be an interesting case though.

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Replying to memyself-eye:
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By Open all hours
16th Oct 2019 12:13

Interesting use of the word talent. Having got past that one though, 100% agree with you.

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By AndyC555
15th Oct 2019 11:59

"...the recent suggestion that Uber drivers are employees rather than self-employed. "

No, the status of the Uber drivers was decided as 'workers' not employees.

I understand Uber are appealing to the Supreme court over the Court of Appeal decision.

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Replying to ImmanuelLieber:
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By Rammstein1
16th Oct 2019 10:01

'the government will push up the cost to the customer by 20%, and almost certainly reduce the tax take as Uber will become less competitive'

Why will the tax take reduce? Uber will then charge the same as other tax firms and won't have the VAT advantage to undercut them.

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Replying to ImmanuelLieber:
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By ProfessionalsUK
16th Oct 2019 10:07

Your response is standard - gig economy response - " if we (UBER/AMAZON etc) pay taxes we will not be able to operate and drivers/stock pickers will lose their jobs" in reality a lot more people lose their jobs because of Gig economy. UBER has workers and they should pay VAT - just as they should also meet rules applied to other taxi drivers, whether doing the knowledge, police checks or having their car serviced.

I agreed HMRC have not been stringent enough on the likes of UBER/Deliveroo/Amazon but perhaps now they will be start to apply them. To at least even the playing field for law abiding businesses ( shops on high streets, taxi drivers, small businesses) who are hammered even if they unwittingly break the rules as they cannot afford high priced accountants and lawyers.

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Replying to ProfessionalsUK:
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By petestar1969
16th Oct 2019 11:10

I've never met a genuinely self-employed taxi driver who earned enough to charge VAT. I'm sure there are some but I believe in the minority.

If Uber lose the VAT case, they won't "pay" VAT, their customers will, all they will do is collect it from the customers and give it to HMRC.

Simple solution - completely ban VAT.

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Replying to petestar1969:
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By Open all hours
16th Oct 2019 12:18

Yes, minority. Those doing school transport and other stuff on the side rake it in well enough and easily enough for six figure turnover.
Not seen many ‘competitive’ tenders. Tax payers as well as pupils being taken for a ride.

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Replying to Open all hours:
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By leon0001
16th Oct 2019 14:19

"Tax payers as well as pupils being taken for a ride"
I thought that was the general idea.

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Replying to Open all hours:
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By leon0001
16th Oct 2019 14:28

Duplicate posting removed.

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Replying to petestar1969:
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By leon0001
16th Oct 2019 14:08

How are you going to change EU law, which mandates the VAT regime?

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Replying to ProfessionalsUK:
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By philaccountant
17th Oct 2019 09:23

@ProfessionalsUK
Glad somebody said it! Hear hear

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Replying to ImmanuelLieber:
By Ruddles
21st Oct 2019 22:04

You don’t know what you’re talking about. As usual.

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By Comptable
16th Oct 2019 11:00

This is only one of the VAT issues with Uber; admittedly it is the bigger one and it is the one where HMRC that loses out.
The other is (or certainly was a year ago) to do with the drivers, some of whom are VAT registered and some of whom are not.
This means that if your driver is not VAT registered and you are charged £24 and that is what the driver gets (after Uber takes its bite). You have paid no VAT and you have no VAT to recover.
If however the driver is VAT registered and you are charged £24 that would normally be £20 fare plus £4 VAT but Uber does not issue VAT invoices so you have nothing to support a claim to recover that £4.
So the driver gets £24 less what Uber takes and pays over the VAT that he has collected from you.
So Uber is not losing out here, nor is HMRC (on this bit), and the VAT registered driver is paying what is due.
The one who is being stuffed is the passenger who cannot recover the VAT that he has paid because he has no VAT invoice.

Thanks (4)
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By Comptable
16th Oct 2019 11:00

This is only one of the VAT issues with Uber; admittedly it is the bigger one and it is the one where HMRC that loses out.
The other is (or certainly was a year ago) to do with the drivers, some of whom are VAT registered and some of whom are not.
This means that if your driver is not VAT registered and you are charged £24 and that is what the driver gets (after Uber takes its bite). You have paid no VAT and you have no VAT to recover.
If however the driver is VAT registered and you are charged £24 that would normally be £20 fare plus £4 VAT but Uber does not issue VAT invoices so you have nothing to support a claim to recover that £4.
So the driver gets £24 less what Uber takes and pays over the VAT that he has collected from you.
So Uber is not losing out here, nor is HMRC (on this bit), and the VAT registered driver is paying what is due.
The one who is being stuffed is the passenger who cannot recover the VAT that he has paid because he has no VAT invoice.

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By Trevor Brunwin
16th Oct 2019 11:03

This situation highlights a more fundemental problem, in that our society has gone through a revolution over the last 20 years, with advanced technology and our economy being inevitably dictated to by globalisation. Whilst commercial enterprises and invested in order to cope with these changes, the government led legal, political, financial and tax systems have not. This causes the type of problem raised here, as well as many others.

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By dgilmour51
16th Oct 2019 11:13

What I find interesting in all this is that its an illustration of 'how things turn out'.
There is no doubt that the original intent of the Uber developers was to provide software/app facilities to match up potential passengers with potential drivers.
It made very good commercial sense, so that Uber were assured of their 'cut' for them to act as intermediary in cash collection - the fact that this was an 'added convenience' for many drivers being a good outcome for all - esp. as many normal people don't care about figures till tax return time when it all comes as an annually recurrant 'orrible shock.
It is also to be noted that Uber design was originally under USA's IRS thinking. It always comes as a surprise to USA companies that not every regime matches their own.
Once people became 'dependent' on Uber their, and the authorities, view of it altered and the likes of payments for Holidays etc. arose - leading eventually to the workers/employment and VAT discussions.
I contend that what Uber intended to provide and what they have ended up being are poles apart and the new parameters are outwith Uber's intended design - with all the consequential headaches that has brought.
One wonders how to flag this type of danger to entrepreneurs in general - who can tell what the predation of the authorities will incur.

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By flightdeck
16th Oct 2019 11:24

Just pay your taxes dudes. You're a huge business, you turnover a ton of money and employ a lot of drivers who enjoy the benefits of using Uber's client reach and service vs having to trawl for punters and wait on the rank.

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By The Dullard
16th Oct 2019 13:38

Does Uber have any cars to provide a taxi service with?

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Replying to The Dullard:
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By leon0001
16th Oct 2019 14:11

No, but the service is provided by drivers who work for Uber.

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Replying to leon0001:
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By SimonLever
17th Oct 2019 14:05

Not yet.

When driverless cars come in and Uber drops all of its drivers then it will.

At that stage it will no doubt have a plan to get around the VAT "problem".

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By AnnAccountant
16th Oct 2019 14:03

Maybe drop the VAT threshold so it only really covers hobby/small side gig earnings.

The high threshold is an unfair advantage in a lot of businesses.

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By leon0001
16th Oct 2019 14:18

Uber London Limited is operating on a temporary two month licence extension from its regulator, Transport for London.
It still does not have a normal licence because it has yet to satisfy TfL that its practices and procedures are sufficient to be deemed a fit and proper company to provide services to the public.
The VAT problem appears to be symptomatic of its general attitude towards complying with the law.

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By sculptureofman
16th Oct 2019 14:24

This is a unique problem to the UK due to the ludicrously high VAT reg threshold. Drop it to say £10k and this problem vanishes.

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By beancounter27
16th Oct 2019 14:56

Dealt with this problem 30+ years ago when local taxi company was client and challenged by HMRC. We won and I recollect it was because the company was owned by the drivers so it was clearly an agency for them and, I think, the principle of unjust enrichment prevented any reclaim for earlier years as the company could not trace the customers to pass on any VAT

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By moneymanager
17th Oct 2019 12:02

I'd rather HMRC concentrate resource on the Corportaion Tax issue, with Costa now owned by Coca-Cola, US based Cafe Nero and Starbucks and with all of us buying "stuff" in Luxembourg who is actually paying for Britain's infrastucture?

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By moneymanager
17th Oct 2019 12:02

I'd rather HMRC concentrate resource on the Corportaion Tax issue, with Costa now owned by Coca-Cola, US based Cafe Nero and Starbucks and with all of us buying "stuff" in Luxembourg who is actually paying for Britain's infrastucture?

Thanks (0)
avatar
By moneymanager
17th Oct 2019 12:02

I'd rather HMRC concentrate resource on the Corportaion Tax issue, with Costa now owned by Coca-Cola, US based Cafe Nero and Starbucks and with all of us buying "stuff" in Luxembourg who is actually paying for Britain's infrastucture?

Thanks (0)