There is an array of more practical VAT measures that are in place, or could be explored, to resolve the VAT issues around the gig and sharing economies. The shared aim of these measures would be to reduce the VAT leakage in the least administratively onerous way possible for all parties. Ideally, through voluntary measures so as not to hit legislative blocks.
This blog is part of series from an article first published in British Tax review. VAT Calc’s Advisor andAuditor services can help on determining and reporting the correct VAT or GST on gig and sharing economy transactions around the world.
Below is a summary of the potential policies, together with some operating examples, which could be implemented to resolve the VAT issues relating to the gig and sharing economies. The challenges to the implementation of such policies are also discussed.
VAT education programmes: targeting individuals
Most individuals do not understand their tax obligations. This is down to lack of readily available information, written in layman’s terms. Since the issues are novel and complex, this lack of understanding is understandable. The regular route of seeking qualified tax advice is, usually, prohibitively expensive for those on the low incomes associated with the gig and sharing economies.
Increasingly tax authorities, including HMRC, are creating dedicated materials, primarily on the web, for individuals operating in these sectors. Examples include social media campaigns, such as those in Denmark, France and Australia, which reach out to all registered ride-sharing drivers each quarter. Ireland obliges individuals to report their quarterly income on house-sharing, which the Revenue then uses to remind them to report in their annual tax return. HMRC have a small business online forum on reporting and paying taxes for the first time, some of it peer-to-peer.
Using public data: limits on privacy
However, and also increasingly, tax authorities use advanced public data gathering tools to amass details on individuals, products, pricing and activities on gig and sharing platforms. In December 2019 French courts gave the tax authorities powers to trawl users’ profiles, posts and pictures for evidence of undisclosed income.16
Mostly, tax authorities are using crude scraping and crawling tools. Progressively, artificial intelligence and data analytics are being deployed to compare VAT declarations (or lack of them!) with activities on gig platforms. In Europe, Spain is possibly the most advanced in this area.
However, data protection, General Data Protection Regulation (GDPR)17 and civil liberties issues create concerns about tapping into individuals’ public profiles. The French court acknowledged that users’ privacy and freedom of expression could be compromised and has included caveats to the legislation. This indicates that mining public data for VAT evasion may have its limits.
Legislative simplification: roll on e-invoices
The modification and simplification of compliance is the measure which is most readily controllable by the tax authorities. Starting with the VAT registration process, a number of countries are looking to basic application processes for the gig and sharing economies which give only a limited range of VAT features. Countries like Australia and New Zealand now provide basic VAT number schemes which allow declarations of income and sales VAT only. There is no scope for deducting input VAT, which is often exploited for VAT fraud. This is based on the premise that it is preferable to have individuals in the system paying taxes rather than outside the system committing evasion.
VAT registration thresholds, whilst well-meaning as a tax subsidy for start-ups, generally only serve to confuse individuals as to when and if they should be registered (see above). One solution is to require immediate registration irrespective of income, but with automated calculation determined by the tax authorities based on declared outputs (sales). This would eliminate any doubt individuals, and the marketplaces which register them, may have about whether or not an active VAT number needs to be in place. Countries which have already adopted live transaction/e-invoice reporting (Italy; Spain; Hungary; Brazil; and many more) now have the data for this. They are piloting pre-completed VAT returns based on this input to reduce the scope for error and fraud by individuals.
Marketplace voluntary measures and reporting
Since marketplaces hold individuals’ data—albeit limited to the business model needs of these individuals—these marketplaces are an obvious source of information. This can help the tax authorities to at least identify individuals who are active in marketplaces. Some marketplaces may hold and provide transactional-level data (goods; prices; customers; etc.) to help calculate VAT liabilities.
The UK is relatively advanced in this area as evidenced by the UK’s marketplace voluntary codeof conduct protocol on reducing fraud. The code of conduct covers: education of individuals active in the marketplaces; and provision of data on request to HMRC. HMRC now publish the names of those online marketplaces that sign up to the agreement: effectively a “whitelist” of participants. Denmark has been investigating the voluntary disclosure of property rental income by the major marketplaces.
Whilst this has been helpful in setting a level playing field for marketplaces, there are complications. Voluntary disclosures can break down when cross-border platforms are involved. Data protection and privacy rules in countries like Germany prevent widescale data surrender; only information pursuant to individual requests can be surrendered.
Marketplace compulsory measures and reporting: blunt but effective
As voluntary reporting obligations on marketplaces have had mixed fortunes, countries in Europe are now introducing mandatory measures. However, so far, it has been limited to e-commerce goods.
Since 2018, the UK has obliged marketplaces to verify all non-EU third party sellers’ VAT numbers. In 2019, Germany introduced a controversial “digital signature” requirement, which obliged foreign sellers to obtain a paper certificate from their German federal tax office to prove they are up to date on their VAT. This must then be provided to the marketplace which would be held liable for any missing VAT on unchecked sellers. In October 2019, the EU Commission has challenged this measure as disproportionate since it is paper based.20
Whatever the compulsory requirements on marketplaces, what has been interesting is that the outcome has been for marketplaces to impose blanket VAT registrations on all their sellers. If they do not provide a valid VAT number, then they are blocked irrespective of the VAT registration threshold to which the seller or individual may be entitled. Full compliance for all.
In terms of compulsory reporting, Italy and France now require monthly or quarterly transaction listing of sellers from marketplaces. Again, so far, only for e-commerce goods.
Without doubt, these VAT measures and reporting requirements on marketplaces will migrate to the gig and sharing economies. Uber provides income data for both self-employed drivers and taxi firms to the Czech authorities. It is done as a real-time cash reporting process by Uber. It also checks if the driver is VAT registered. Norway is progressing towards home rental marketplaces, such as Airbnb and HomeAway, disclosing the taxable activities of hosts on their websites.
Payment provider compulsory reporting: legacy issues the blocker
A tax data source for the future could be payment service providers. These include: issuers of credit cards; bank debit and transfer providers; online payments (for example, PayPal); e-wallets; andcryptocurrencies.
The EU21 has planned that there will be compulsory reporting of e-commerce goods payments by this sector by 2024. Since most payments are readily identifiable when going through a marketplace, it is not a major stretch to extend this to the gig and sharing economies. The challenge here is the legacy systems of payment service providers. Their IT architecture does not support deep transactional data and could, in no way, help calculate possible VAT liabilities. They will have to make a significant investment to support a meaningful exchange of tax data—the major reason for the 2024 deadline.
VAT compliance help: compulsion is the trend
In addition to providing basic education on VAT obligations, some marketplaces provide individuals with names and contact details of VAT specialist advisory firms. Marketplaces also try to negotiate discounted rates with the firms on behalf of the individuals. However, the marketplaces stay out of the contracting.
Increasingly, marketplaces are obliging individuals to sign up with these firms during the on-boarding process. Failure to do so may mean they are blocked. Individuals do, however, retain the option to use compliance firms of their own choice, provided they produce evidence on contracting.
In the e-commerce world, Amazon has built in a VAT returns service to its Seller Central account. Each month/quarter, transaction data is automatically extracted from the seller’s records, VAT calculated, and a draft return prepared for the seller to review. The return is then filed for the seller via an outside VAT specialist firm. Again, the VAT compliance obligations and liabilities rest with the seller and the VAT firm, not the marketplace.