Yesterday HMRC published a call for evidence on VAT and the sharing economy.

It is another piece in the puzzle of whether and how tax rules should be adapted to reflect the change in ways of doing business and the growth of the digital economy.  This time, it's the turn of VAT.

At heart, it is another question of whether the use of digital platforms without a physical UK presence is eroding the UK tax base (in this case VAT base) and whether a response is required. 

The registration threshold for VAT in the UK is £85,000 of turnover per annum.  So, if you have a business of providing a service which is not exempt from VAT - taxi services, cleaning services or furnished holiday lets, for example - you do not have to charge VAT on the supplies you make unless and until you exceed this threshold.  There are many individuals and small businesses who fall into this category.

It is common for such persons to supply their services through some form of agency which takes a cut.  A classic example would be the local minicab firm with a number of self-employed drivers on its books.  It will book trips as the drivers' agent and charge them a fee for doing so.  Assuming the minicab firm's turnover (the fees it charges to all of its drivers) is above the registration threshold, it will charge VAT on its fees.  The same principle would apply to fees charged by a UK agency arranging cleaners, furnished holiday lets and so forth.  But, because the minicab firm acts as the drivers' agent, the underlying supply of taxi services by the driver is not subject to VAT because the driver remains under the registration threshold themselves.

But it's becoming increasingly the case that the local agency with a physical UK presence is replaced by an online platform without one.  And where that happens, under the current rules, the VAT cost disappears.  It is important to note at this point that that is not because there is anything untoward going on, that is simply a consequence of applying the existing rules to a new way of working.  Hence, why the question is whether the rules should be changed.

The digital platform does not have to charge VAT on its fees because this is treated as a 'business to business' transaction and the VAT place of supply rules treat the supply as made where the recipient is based, i.e. the UK.  So, the digital platform does not have to charge 'home jurisdiction' VAT.  Instead, the supply is subject to the reverse charge procedure in the UK, meaning that the recipient business has to account for UK VAT on it instead -unless, of course, that recipient's turnover is below the VAT registration threshold.  Hence, no VAT actually needs to be paid on the fee.

The Government sees two potential issues here.  First, a loss of tax revenue as more individuals and small business switch to digital platforms without a UK presence. Secondly, a distortion of competition as such businesses do not have a VAT cost to pass on to their users.  And so, one of the questions raised is whether they should require those platforms to register for, and pay, UK VAT on the fees they charge and how to go about that.

But the paper asks a more fundamental question, too.  Is it right that these platforms are treated in the same way as a traditional agency so that the underlying service to the consumer is still treated as supplied by the individual who performs it and not subject to VAT?  Or, as these platforms generally look to exert a greater degree of control over both the individuals supplying services through it and how those services are supplied, and are often valuable brands in their own right, do we need new rules such that once certain criteria are met the platforms would be required to account for UK VAT on those underlying supplies?