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Uber + VAT

As the controversial company Uber has grown to reach a valuation approaching $70 billion, its problems have also mounted. Legal actions have spread across the globe and regulatory enforcement and/or litigation have been undertaken against it in 34 countries and 19 U.S. states.

In recent years, no rising star in the tech space has shone more brightly over Silicon Valley than Uber. Since its San Francisco launch in May 2010, the company has (according to its website) deployed its taxi-hailing platform in nearly 600 cities across 80 countries. But as the controversial private company has grown to reach a valuation approaching $70 billion— ahead of an eagerly awaited IPO —its problems have also mounted.

Feeling their livelihoods threatened, protests by licensed taxi drivers have become commonplace in many cities. Meanwhile, legal actions have proliferated across the globe almost as rapidly as each new city is added to the Uber app list. Regulatory enforcement and/or litigation have been undertaken against it in 34 countries and 19 U.S. states. In some countries, such as Finland and Hungary, the service has been suspended.

The Uber Employment Tribunal

Uber’s travails in the U.K. are no less well-documented.  In July 2016, 19 Uber drivers contested their “employment” status, claiming that their employment terms and conditions meant they were not self-employed but were in fact “workers.”

The Employment Tribunal found that:

  1. from a contractual perspective, Uber provided the supply of transport to the customers; and
  2. the drivers were workers for employment tax purposes, meaning they should be entitled to benefits such as the right to be paid the National Minimum Wage, holiday pay and pension.

Whilst Uber has appealed the decision, which is expected to be heard in September this year, it has brought the company’s VAT arrangements into full view. On June 7, Reuters claimed, “Uber is able to avoid VAT by exploiting a loophole in how the tax is collected for business-to-business sales across EU borders, which arises because it treats its 40,000 U.K. drivers as separate businesses, each too small to register for VAT.” The total sum “avoided” would be in the region of 40 million pounds per annum. This, however, is something of a sensationalist headline.

The Contractual Arrangements

The heart of the tax matter rests with the questions: should VAT be charged in the Uber supply chain? By which party and to whom? Uber argues that it is in the business operating a booking service via an app that allows customers to connect with self-employed taxi drivers—it is not in the business of providing taxi travel.

The transactions that need to be analyzed are:

  • the provision of the taxi service to the customer; and
  • the commission payable by the driver to Uber BV in the Netherlands for the use of the app.

Provision of the Taxi Service

Unlike passenger transport in buses, trains and airplanes, the fares charged to passengers for taxi or private hire journeys by the end supplier are liable to VAT at the standard rate.  The question is: who is the end supplier?

Tax, employment law and the Working Time Regulations all have the concept of “worker” (i.e., as close to being an employee without actually attaining that status) ( The issue for Uber and indeed the media when commenting on Uber’s VAT arrangements is that three sets of rules apply to the three separate regimes. Being a worker for the purposes of employment law does not make you a worker for VAT.  Any claim to the contrary presupposes that the decision of an employment tax tribunal is binding for VAT purposes, which is something of a leap. A VAT tribunal would most probably analyze the contractual arrangements in much more detail and from a different perspective.

Uber contends that the driver is self-employed and the end supplier, and therefore obligated to charge VAT. However, since most drivers will not exceed the current VAT registration threshold of 85,000 pounds per annum they are under no legal obligation to charge VAT to the customer.

The most immediate comparator would be licensed London black cab drivers, who, like their Uber counterparts, are self-employed. For those using black cabs, the fare charged by the driver to the customer is not subject to VAT because the vast majority of drivers fall below the registration threshold of 85,000 pounds. For the very few black cab drivers who generate total fares in excess of that figure, they are legally obliged to register for VAT if the full amount they are paid for services supplied exceeds the registration threshold.

The problem Uber faces is a result of the Employment Tribunal finding that the drivers are workers (i.e., not self-employed) for the purposes of employment tax. If, and it is a very big if, a VAT tribunal also finds the drivers to be workers for VAT purposes, then Uber will likely be considered to be the end supplier of the taxi service. Uber would then be obliged to register for VAT in the UK and charge the customer VAT.

The Commission Payable by the Driver

Drivers wishing to use the Uber platform have to pay commission on bookings to an Uber subsidiary based in the Netherlands. The issue here is whether Uber should be charging VAT on that commission.

The current arrangements between Uber BV and the self-employed drivers benefit from the Reverse Charge Mechanism (“RCM”). The RCM is designed to simplify trade within the European Union (“EU”) single market: shifting the responsibility for reporting a VAT transaction from the seller to the buyer of a good or service.

The RCM allows businesses to sell and trade within the EU without physically paying VAT (i.e., the cash element) across borders. Given current Uber practice, the individual drivers become responsible for the VAT, enabling Uber to be relieved of the VAT burden.  The RCM is designed to cut red tape and shift the responsibility for collecting VAT to the importing country —it was not intended to allow companies to escape VAT altogether.

Whilst the transaction between Uber and the driver is a business-to-business one, the driver will more than likely not be VAT-registered. This is critical: some argue that a supplier should not use the RCM if they are selling to a customer without a VAT registration (as is the case with Uber in the U.K.). Indeed, a number of EU Member States require non-VAT-registered buyers to pay the VAT when they import goods or services VAT-free across EU borders.

The U.K., by contrast, has adopted a more liberal approach in allowing a non-VAT-registered business to avail the RCM. This lack of harmonization across the EU has led to the current status quo. Tellingly, Reuters revealed in its report on Uber: “Three European tax experts consulted by Reuters said Uber’s practice probably complies with the way Britain has decided to implement EU rules.”

Unless the U.K. alters its application of the RCM, there is no mechanism for Uber to charge the drivers VAT. If Uber had established itself in the U.K. and provided its app to U.K. drivers then a VAT obligation would exist, but there is no law that dictates that Uber, as a foreign headquartered multinational, has to base itself in the U.K. or anywhere else: they have total freedom to choose where they place their regional center of business.


Dame Margaret Hodge MP, former Chairman of the Public Accounts Committee in Parliament, has commented that the case of Uber “is yet another example of how large companies find loopholes and use the law for a purpose for which it was never intended. There is a failure to pay tax that should be due.”

Dame Margaret may believe herself to be well-intentioned in her criticism, but the reality is that Uber doesn’t make domestic U.K. law, nor does it interpret EU law. Loopholes, if that is what they are, exist for many reasons: badly drafted legislation, incompatibility across the EU, and perhaps most importantly, the U.K.’s application of the RCM to non-VAT-registered businesses. Dame Margaret Hodge’s rush to judgment over Uber follows her well-publicized criticisms of Google, Amazon and Starbucks. It is further evidence of an influential politician who appears to have little interest in either understanding the complexity of tax legislation or rigor for factual analysis.

Hodge, however, is not alone. Many politicians and journalists have failed to understand, or have willfully chosen to misunderstand, the Uber business model.  Uber is not a taxi firm: it has developed an app that simply connects the customer to the driver. To suggest otherwise is, to borrow a phrase, fake news.

As a U.S.-headquartered company, Uber has chosen to base its European business operations in the Netherlands, like dozens of other multinational businesses before it, both European and non-European. This is not part of a cunning plan to avoid charging VAT to U.K. customers; rather, it is another U.S. multinational that has selected the Netherlands as its EU hub, principally for U.S. tax planning purposes (i.e., the deferral of U.S. tax using a combination of domestic U.S. provisions, double tax treaties, and in this case Bermuda).

Should a future government be elected on the basis of changing the relevant legislation then there would inevitably be in a change to the status quo. But unless this happens, there is no failure by Uber to charge VAT because there is no such VAT due.


This article was published in Bloomberg BNA

Reproduced with permission from Copyright 2017 The Bureau of National Afairs, Inc. (800-372-1033)


Posted in VAT

August 14, 2017

Miles Dean

Posted by Miles

Miles is a founder of Milestone having started his career in international tax in 1994.

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