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.
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.