VAT and trading online: Part 1 – Third parties
Neil Warren considers whether online marketplaces are underpaying VAT and why three-party online arrangements for online sellers can be so difficult to untangle.
This is the first article of a four-part series about VAT and online marketplaces that can sell anything from hotel bookings, bespoke essays (as in the All Answers case) to pornography (Only Fans).
Three party problem
VAT has always been a tricky tax when there are three parties involved in a deal.
I can still remember back in the 1990s when I was an officer in Customs and Excise sitting at a meeting with the CEO of a major concert venue that had hosted a big show. Also at the meeting was the managing director of the promotion company that had organised everything.
“So which company declared output tax on the ticket sales?” I asked. They simultaneously pointed at each other! The reality was that nearly £250,000 of output tax had been overlooked by both parties and the contract was ambiguous as to which party was responsible for this ‘minor’ issue.
Roll forward about thirty years and think of the online markets you deal with on a regular basis. Those sites often involve three parties, and you are one as the consumer. The other two parties are usually the website owner, and the business with expertise in supplying goods or services required, eg a hotel on a booking website.
How does VAT fit with this arrangement?
Student Steve needs an essay written for his history course at university. He has found an online provider that will arrange for an expert author to write a suitable essay for him. Steve pays the online provider a fee, and that provider pays the self-employed author two thirds of this fee. The online provider is registered for VAT but the author is not VAT registered. What is the VAT position for the online provider?
All Answers tribunal case
This example is deliberately similar to the facts of the All Answers Ltd case (TC6845), first heard at the FTT in 2018.
The issue was whether All Answers Ltd was acting as agent or principal. Is output tax payable on 100% of the fee paid by the student, or only the one third commission retained by All Answers Ltd? The tribunal agreed with HMRC that the company acted as principal and the VAT assessment for over £900,000 was correct.
The taxpayer in All Answers Ltd appealed the FTT decision and the Upper Tribunal released its decision on 30 July 2020, supporting the earlier verdict. The thoughts of the UT can be summarised in the final two sentences of its report: “As we have noted, there were some flaws in the way the FTT approached the question of who made the supply. However, its overall conclusion that the work was supplied by the Appellant, and not by the Writers, was correct.”
I was recently alerted by an Any Answers debate to a major VAT issue being reported in the national newspapers about a website called Only Fans. This is a content subscription website, mainly linking to all manner of "creative" models (the creators).
It works as follows: subscribers will pay a monthly fee to Only Fans for access to content placed on the site by the creators, with the creators getting 80% of the fee and the website keeping 20%.
The Only Fans organisation is based in the UK and the company now accepts that output tax is due on 100% of the fees received, in the same way as Any Answers Ltd, and not just the 20% commission as it previously thought. The position has apparently been corrected from 1 July 2020, and arrears of VAT are presumably being dealt with for previous years.
As advisers you need to consider the All Answers and Only Fans scenarios and ask whether there might be similar problems lurking in the set-up of your own online trading clients.
The idea of this series of articles was prompted by the difficulties I encountered dealing with a query from an accountant about computer software supplies being made by a client on another online marketplace based in America. I’ll share this story in my next article as there were four parties involved in that instance! This adds another VAT challenge to the equation, namely the ‘place of supply’ rules and issues of business to business (B2B) as opposed to business to consumer (B2C) transactions.
In the later articles, I’ll consider internet trading in goods and also issues concerning HMRC.