Thursday, 10 October 2019

Uber’s UK VAT liability confirmed

Earlier this week Uber London Ltd filed its full accounts up until December 2018 at Companies House
The big news wasn’t that the division made a relatively meagre profit of £5.1m. (The profit is hardly indicative of anything due to the group’s structural complexity.)
It was Note 13 which recounted the following about Uber London’s contingent liabilities: 
The most newsworthy part was arguably this one: “the Uber Group is involved in an ongoing dialog with HMRC, which is seeking to classify the Uber Group as a transportation provider. Being classified as a transportation provider would result in a VAT (20%) on Gross Bookings or on the service fee that the Company charges Drivers, both retroactively and prospectively.”

Uber London’s accounts do not provide any indication of the total sum being recorded as a contingent liability at Uber London’s parent, the Uber Group.

But various sources tell us the bill could be as large as £1bn, or more. These are not small sums.

But the statement is striking for other reasons too.
First, Uber says it’s in an “ongoing dialog” with HMRC which hints at a negotiation taking place to potentially lower Uber’s liability. But that’s a big no no for HMRC. The tax authorities are not supposed to cut deals with corporations on unpaid back taxes, not least because of the scale of public outrage associated with legacy sweetheart deals, which prompted far-ranging internal policy reviews. 

HMRC told FT Alphaville that on an ongoing basis it investigates about half of the UK’s large businesses at any one time. As part of that process companies are man-marked with HMRC officers whose job it is to speak to the financial people at the organisation. So it could be that Uber is treating this sort of relationship as a dialogue. 

But a source tells Alphaville the view at Uber seems to be that the company sees itself as in negotiations with HMRC, with a view to settling the case before the all-important outcome of its UK Supreme Court appeal regarding its employer status is determined.
The other issue is the nature of the exposure and HMRC’s overall responsibility to capture its full extent.

It’s worth noting Alphaville first alerted readers to Uber’s potential VAT tax exposure in December 2016. At that time it was well known that the tax exposure in question was contingent on Uber successfully defending a tribunal case regarding the employment status of the company’s drivers. A loss would see the company’s drivers classified as workers not contractors, which would incur costly employer liabilities upon Uber, among them a VAT liability.

This is a big deal because the threshold for UK businesses having to pay VAT at the time was a turnover of more than £81K (it’s now £85k).
Since Uber drivers mostly earn much less than that, most do not incur VAT liabilities. If Uber is deemed an employer, however, those revenues would then be deemed Uber’s rather than drivers’ — more than surpassing the VAT threshold and thus exposing the company to potentially huge VAT liabilities from then on.

But the ruling would also reveal how much tax revenue the state will have missed out on over the years because of Uber’s potentially incorrect insistence it is not an employer.
The problem for HMRC is that there is a statute of limitation that ensures the tax authority cannot claim unpaid sums beyond the past four years.

This poses a bit of a quandary for the revenue services. What is a tax authority to do if it suspects a company may be hugely underpaying tax liabilities because of an incorrect employer classification, but cannot claim those sums until a final court ruling about that classification is determined.

One course of action according to Jolyon Maugham QC, who fronts the Good Law project — a non-profit that seeks to support progressive law change in a way that reduces public distrust of the establishment — is for the tax authority to engage in something called a protective assessment as soon as possible. This would allow HMRC to protect its position by flagging that an effective inquiry has begun, in turn allowing it to seek back-taxes from four years before that point even as more time passes.

In Mr Maugham’s opinion it would be a failure of governance at HMRC for the authority not to have issued such an assessment as soon as it was made aware of the issues at stake, irrespective of the pending nature of the all important employer status appeal.

When Mr Maugham made this view known to HMRC back in March in a letter before action, however, the authority’s view seemed to be that it would need to wait until the case was determined to do so. And so, in bid to get to the bottom of the legalities of the situation, the Good Law Project announced on May 29 of this year that it would be suing HMRC via judicial review for failing “to stem losses due to Uber’s tax dodging.” 

It is Mr Maugham’s contention that up to £1.1bn of tax is at stake. You can read Mr Maugham’s witness statement, which offers more details on how that figure is arrived at, here. 

But there’s another issue in play. As an interested party in the action, Uber has a right to legally represent its interests in the case if it wishes. One of those interests is that the case does not inadvertently expose its private tax affairs to the general public given that in the UK, all tax affairs are deemed private and confidential, including the issue of whether protective assessments have been initiated.

Uber has made it known to Mr Maugham that it will be engaging in the case to ensure any privileged information revealed by the process stays private and confidential and subject to an order that it is “protected from onward disclosure to third parties”. 

A hearing on the matter is due on November 6 at the High Court.
Of course, the fact that Uber London since filed a company account noting that a dialogue with HMRC over a VAT liability is ongoing implies some sort of protective assessment may already have been initiated. So to some extent the cat is already out of the bag.

Commenting on the case, Mr. Maugham told FT Alphaville:
It has taken three years for us to force HMRC to collect tax from Uber. Many hundreds of millions of pounds will have been lost because of its inaction. We will now turn our attention to ensuring that other big transport suppliers — such as Addison Lee — comply with the law. And to those, like Amazon, operating arrangements that seem to us to be similar in character.

In response Uber’s spokeswoman said: 
We can't comment on any discussions with HMRC but we will always fulfil the tax obligations in any country in which we operate.
Finally, HMRC told Alphaville:

We don’t comment on identifiable businesses. HMRC will always make sure that every business, no matter its size, pays all the taxes due under UK law and we don’t settle for less.

One thing’s for sure. It’s a tax case that could have a huge bearing on Uber’s profit-and-loss at some point, with equally important implications for Uber’s operations in Europe, which also bear similar VAT exposure.

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