Back in July 2016, Uber taxi drivers had a case heard in the London Central Employment Tribunal which concerned whether in the UK Uber drivers should be:
- Seen as employees of Uber; or
- deemed to be self-employed and hence working independently
The decision was handed down in October 2016 with the decision being that the drivers are employees of Uber. This has important employment ramifications such as Uber drivers being entitled to worker’s rights including being paid the National Minimum Wage and receiving paid holiday.
However, a key point which has almost gone under the radar (but been brought into the spotlight recently by Jolyon Maughan) since the ruling was passed down is whether there are any other tax implications for Uber aside from those related to employment taxes. These could occur because the outcome of the ruling is that the way Uber’s business is structured has, fundamentally, become subject to change.
With this point in mind it then becomes necessary to consider if Uber’s VAT position is impacted, because VAT is a tax where obligations and treatments are very much determined based on the facts that specifically apply to a transaction. Given that Uber has been judged to be an employer and not agent, it follows that the VAT position should also be reviewed.
Historically, for VAT purposes Uber has operated on the basis that it acts on behalf of the driver as a booking agent. It argues that the taxable supply of transport made to the passenger is not supplied by Uber but instead by the self-employed driver. This position supports Uber’s contention that it does not employ the driver – which the decision from the Employment Tribunal is at odds with.
If the tribunal ruling is upheld (and Uber have appealed, so there will be more to this story) it would be conceivable that for VAT purposes Uber will become the principal in the supply chain. This means, in practice, that Uber becomes the business which is making the supply of transport to the passenger, rather than the driver. The driver, therefore, is then seen to make a supply of services to Uber (i.e. Uber begins to incur costs from the drivers).
The supply of transport in a mini-cab is a service which in the UK is subject to the standard rate of VAT, currently set at 20%. So, the consequence of Uber being deemed to make the supply to the customer is that Uber assumes responsibility to take that VAT due into account when it receives income. For an example of what that means, when a £12 fare is charged, £2 of that will be due to HMRC as VAT.
So what, I hear you say – surely there is no difference because the drivers would also have been charging VAT to customers? Well, this is where the problem lies. In the UK, an established person or business does not have to register for VAT until the registration threshold is exceeded. Given that the present value of this threshold is £83,000, it’s not surprising to learn that most Uber drivers are not VAT registered. This means that they were not charging VAT to the passengers. This relationship between taxi driver, taxi company and passenger is one that has been tested many times for VAT purposes at the Tax Tribunal because of the complexities involved and of course the benefits that can accrue if structured correctly.
As the employment tribunal case is being challenged and hence has further to run, certainty on the outcome of this issue cannot be given. It should be noted though that HMRC don’t have to wait for the outcome of the case however to review and issue notice to Uber that they think the VAT treatment should change. The treatment of a supply in the UK and the EU is normally determined by reference to the contractual position but, if required, the economic reality of a situation can be relied on instead if the tax authority doesn’t believe the right tax result is being achieved.
Therefore, it is not inconceivable that Uber will have to consider how to manage this VAT liability going forward regardless of the outcome of the employment case. If it had to start accounting for VAT then (on the basis it doesn’t increase prices) by looking at the 2015 sales figures, a VAT liability of circa £20 million might be due each year going forward. It could also get much worse because HMRC may look to review sales made over the past 4 years and ask for VAT due on that income. Other EU Member States where Uber operate might also take the same approach to the VAT treatment if Uber operates a similar business model there and demand payment of VAT both going forward and from the past. If this was to happen, the VAT bill for Uber could become very big indeed.
Nothing in this case is yet certain and of course it is entirely possible that it is found that Uber’s current business structure doesn’t involve it being an employer. If this was the case then, potentially, there would be no changes to either employment tax or VAT treatments required. However, it does again highlight the need for businesses to consider and evaluate how their desired operational structures will impact on taxes and importantly, the need to consider any unintended consequences that could occur if those operations are challenged (especially when they change).
Being able to substantiate and justify the commercial and economic realities of a business structure is a key part of ensuring that the right VAT treatment will be adopted and that the risk of challenge from tax authorities is minimised. Doing this from the beginning of making new supplies should also help senior management teams and investors minimise the number of sleepless nights which they endure, worrying about unexpected tax bills coming their way.
That said, we appear to be entering a period where the existing tax statutes may struggle to keep up to date with the rapidly changing way in which businesses operate. The model used by Uber is not unique amongst the fast growing “Gig” economy businesses whilst cases like the recently heard Pimlico Plumbers employment tribunal create further uncertainty on the issue. Being aware of these changes and factoring them into the decision-making process when determining business structures and tax treatments is going to be key when looking to minimise risks going forward.