E-commerce – is the appropriate tax being paid? – Anthony Lampard
Anthony Lampard, director at Andersen in the UK, discusses the tax issues facing new online businesses, especially on digital platforms, in Taxation.
Anthony’s article was published in Taxation, 16 November 2021, and can be found here.
Over the last few years there has been a significant increase in customers buying goods and services via digital platforms and this has accelerated during the pandemic.
Many individuals have taken this time to develop new online businesses and in doing so, may not always have considered the tax consequences.
The problem arose as many of the digital platforms are based overseas, so creating problems both for the platforms and the tax authorities in collating information relating to sellers and the income that they have received.
The OECD therefore worked to develop model rules with respect to digital platforms used by sellers and their customers to ensure that there was consistency in the information requested from the digital platforms, avoidance of duplication and some carve-outs where the risk is low.
The UK has recently completed a period of consultation relating to the practical implications of enacting the model rules. The current intention is that the model rules apply from 1 January 2023.
These rules build in a couple of recent themes that the Government has issued papers on, namely the need to make the tax administration system fit for the twenty first century, and the need to educate taxpayers so that the perceived tax gap can be reduced.
This has implications both for operators of digital platforms, but also for businesses and individuals.
As more transactions occur online, there is a proposal that from 1 January 2023, platform providers will need to provide information to HMRC which can be shared with other tax jurisdictions as well as the sellers.
The recent consultation document proposed that platforms will need to register with HMRC, verify and provide to HMRC personal information about active sellers, together with details of income and expenses relating to the seller.
The relevant reporting periods will be a calendar year, with potentially the first report being provided to HMRC by 31 January 2024, although the platforms can defer submitting their initial report by up to 12 months.
Equally the Government wants the platforms to also provide links to relevant documents reminding sellers about the need to account for tax, so being part of the process in educating taxpayers and hopefully reducing the errors that occur.
We consider below in greater detail, both the implications for platform providers and users as well as some potential practical issues that may need to be considered by Government and taxpayers.
A platform operator is subject to the model rules where they are tax resident, incorporated or managed in a jurisdiction that has adopted the rules, are not specifically excluded, and facilitate the provision of relevant services.
A platform can be excluded from reporting where either its total consideration received over the previous year was less than €1m and it elects to be excluded, the platform’s business model does not allow the seller to make a profit, or it does not have any reportable sellers in jurisdictions that have signed up to the OECD rules.
Relevant services are defined as rental income, personal services and transport rental provided for consideration. Personal services are widely defined and include delivery, freelance, professional & online work, providing labour or temporary or seasonal work.
Consideration is defined as “compensation in any form that is paid or credited to a seller in connection with relevant services, the amount of which is known or reasonably known by the platform operator”. This is money, cryptocurrency as well as payments in kind, tips, incentives, or gratuities. So, this could apply to digital influencers who may receive a combination of rewards for their work.
However, if the platform operator is unable to satisfy this definition, then the “payment” is not consideration, no relevant services have been provided and so the model rules don’t apply.
Is a user registered on a platform to provide relevant services or sell goods? They are then subdivided between active and non-active sellers. The former had provided services and received consideration during the relevant period. The latter hadn’t, or the transactions were less than 30 and the consideration was below €2,000. In that case, no report is required to HMRC.
There have been three types of sellers where it is viewed that the risk of non-compliance is very low. These are:
- Hotels and large rental providers with more than 2,000 rentals a year. So, a hotel with 20 rooms that are let out more than 100 days in the year would be excluded
- Local and National Government entities
- Listed entities (or related entities) regularly traded on a recognised Stock Exchange
Having considered whether there are any exclusions that may be applicable, it is then necessary for the platform provider to consider what their responsibilities are under these rules.
These are divided into two areas, due diligence and reporting of information.
This is to ensure that the information that the platform provider collects and reports to HMRC about active sellers is both relevant and accurate. Failure to do so can result in the platform provider suffering penalties.
The platform can rely on either another platform operator or an independent third party to carry out the due diligence. Where a platform has more than one platform operator in respect of a platform, then only one operator needs to undertake due diligence.
However, the reporting platform is still responsible for the completion of the report and the accuracy of the information provided.
Even though there is no need to report excluded sellers, the platform provider will need to have checked that the relevant sellers satisfy the conditions to be treated as excluded for the purposes of the rules.
Reporting of Information required to be provided to HMRC for individuals and entities
- First, last names (middle name if available)/legal name
- Primary address – normally the home address/primary registered office address
- Tax Identification Number (TIN) and jurisdiction of issue – applicable to both types of sellers
- Date of birth/ business or company registration number
For rental properties, there will also be a need to collect the address of each property listing. Multiple rooms in a hotel or apartments in one building are treated as a single property listing.
Having gathered this information there will be a need for the platform provider to verify it.
The consultation document issued by HMRC discussed in detail what would be an appropriate tax identification number. It is accepted that the normal TINs may not always be available. They have therefore suggested introducing a Government Verification Service (GVS). This would allow the seller to generate a bespoke code to be the TIN for this exercise.
Using a GVS would simplify the process for the platform providers as the information needed for individuals and entities would normally not need to be collated by the platform provider. It also reduces the risk of unintended disclosure, compared with using existing TINs.
The downsides are two-fold; firstly, this option is unlikely to be available before implementation and secondly the seller would need to keep a record of another reference number, so adding a little complexity.
Determine the sellers’ jurisdiction of residence
The platforms also need to determine the seller’s residence. This can normally be based on the seller’s home or registered office address or via GVS if available.
Timescale for completing the due diligence
Platforms need only undertake due diligence and determine residence for active sellers, so reducing the administrative burden.
The reportable period is a calendar year, and the process normally needs to be completed by the end of the relevant period. However, for the first reporting period the timescale is extended by 12 months. If the rules apply from 1 January 2023, the deadline is extended to 31 December 2024.
Reporting of Information and basis of reporting
HMRC is looking to develop an online service for platform operators to provide information in a standardised format. This is expected to be like that which exists under the Common Reporting Standards (CRS).
All UK platform operators, whether reporting or excluded, will need to register online. However, the latter can then submit a nil return. This highlights to HMRC those platforms that are failing to comply with their reporting obligations.
The normal reporting deadline is the 31 January following the end of the reporting period. However, for the first period this can be extended by 12 months.
If the model rules apply from 1 January 2023, the platform operators need to complete their due diligence on active sellers by 31 December 2024 and the report of information must be provided to HMRC and the individual sellers by 31 January 2025 at the latest.
Information to be reported
The platform operator needs to provide their name, registered office address and TIN, together with the business names of the platforms for whom they are reporting.
Information for the sellers includes:
- Information summarised above for individuals and entities
- The seller’s bank account reference number
- The name of the holder of an account where payments aren’t made to an account in the seller’s name
- The country where the seller is resident
- The quarterly gross consideration, net fees and number of transactions during the reportable period
- For rental properties, the address of each property listing, the number of rentals per property listing
A platform operator will suffer financial penalties for either failing to provide good quality information to HMRC or where there is a failure to comply with the regulations. The latter will be two-fold, an initial penalty and then further daily penalties until the failure is corrected.
Finally, there will be a need for the platform provider to retain their records for a minimum of 5 years after the end of the reporting period and make them available to HMRC if requested. Failure to do so would trigger penalties for the platform.
The Government has indicated that it wants to work with platform operators to help to “educate” sellers by both providing them with a copy of the information shared with HMRC but also links to relevant documents that explain their tax responsibilities.
There is no intention that the platforms will provide tax advice. It is hoped this will help taxpayers correctly report their income and counter a future claim by the seller that they weren’t aware of their tax obligations. If successful, this may enable HMRC to successfully argue that the taxpayer has failed to take reasonable care over their tax affairs.
- One of the drivers of these rules is to reduce the tax gap. However, where the platform provider is unable to or is not reasonably able to know what consideration has been paid, there is no need to make a report to HMRC. Could HMRC be missing a trick?
- HMRC has recently announced a vast number of proposed changes to make the UK tax system more effective for all stakeholders. However, the concern is whether HMRC has the resources now and in the future to make these new proposals succeed.
- What happens where the taxpayer disagrees with the information provided by the platform operator? Who is approached?
- How to value consideration if it isn’t in either currency or crypto currency? Cryptocurrencies can fluctuate in value – does this itself create issues?
- As platform providers often have access to cash payments, is there any scope for some form of tax to be deducted at source? This seems to be the direction of travel, but how does this apply here?
- Do these regulations and Making Tax Digital (MTD) interact, or is there duplication?
- The reportable period is the calendar year. That may cause issues for taxpayers who don’t have a 31 December year end. Is this another reason for the UK considering moving to a calendar year tax basis?
- Sellers will have details of their gross income and fees paid to the platform provider. However, there will be a need to capture the cost of items sold. What should be done if the sales are of second-hand goods no longer needed?