Slave to the Algorithm? VAT, Automation and the “Gig” Economy

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Nicholas Hallam

Nicholas Hallam, Accordance VAT, U.K.

Nicholas Hallam is CEO of Accordance VAT, U.K.

The recent ruling by a U.K. employment tribunal that Uber drivers should be considered as employees of the company could have far-reaching VAT implications for businesses using a similar commercial model.

Last October, a London employment tribunal ruled that drivers for Uber—the online platform energetically disrupting the worldwide taxi market—should be considered as working directly for the company rather than being, as Uber had insisted, self-employed independents. The case, brought by drivers demanding the right to the minimum wage, could have far-reaching implications for the conduct of the “gig” economy in the U.K. and beyond (

But although employment rights—and responsibility for associated social insurance—were the subject of the hearing, the potentially greater threat to Uber's commercial model is an unintended by-product of the decision which concerns the collection of VAT.

I. VAT Implications of Uber Ruling

If the drivers are independent, VAT generally doesn't need to be collected from customers because, in the U.K. at least, the drivers are very unlikely to be VAT registered. However, if the drivers are indeed employees of Uber, a strong case could be made to say that Uber is in fact supplying the taxi services and as such be deemed to owe HM Revenue & Customs (“HMRC”) VAT due on income from customers because it is VAT registered. Uber is appealing against the decision but it faces an uphill struggle: the tribunal judgement deemed Uber's description of its relationship to the drivers to be “pure fiction.”

For Uber, the dilemma created by the employment model would be about suffering or passing on the new VAT cost; and there is no good answer for the company to the question of who pays. The drivers? Disastrous for recruitment. The public? Terrible for business. Uber itself? Toxic for investors. And then there is the problem of dealing with any historic amounts of VAT, which HMRC could deem to have been payable on the basis that the drivers were always employees of Uber.

This potential historical VAT debt (which would cover the past four years of income) has been estimated at anything up to 20 million pounds—and, if Uber succeeds in establishing itself, the amounts due going forward will only grow. Worse still, as tax guru Jolyon Maugham points out (, Uber, which operates the same structure throughout Europe, could soon be facing the issue right across the continent. A completely unforeseen cost could quite easily and rapidly run into hundreds of millions of euros annually.

II. Who is Responsible for VAT?

“Who is responsible for VAT?” is becoming a recurring theme and issue for tech giants disrupting traditional sectors and industries. Amazon and eBay have been the subjects of intense pressure and scrutiny about the non-payment of VAT by users based outside the European Union (“EU”) (Chinese sellers in particular have been the focus of campaigners' ire). Just last year the U.K. Government rushed in legislation that had the effect of making Amazon ultimately liable for VAT left unpaid by its marketplace users, after repeated questions in parliament and criticism of HMRC inaction at the Treasury subcommittee. (

Yet it is a myth that tech firms have made no steps to rectify the problem. Amazon, to take one huge example, has worked on several projects and with several partners to find a practical solution for the issue. The difficulty for the tech firms is that their marketplace model, in which millions of independent businesses and sole traders—from China to Chigwell—operate behind the screen of overarching online platforms, is at odds with the nature of the EU's consumption tax, VAT.

The Organisation for Economic Co-operation and Development believes that governments will (and should) rely more and more on VAT for revenue because globalization and technological development have conspired to make it harder to collect income and corporation tax. But there are potential glitches in the grand plan. VAT calculations can only be made correctly if there is an understanding of the nature of a transaction, and of the activities that stand behind the transaction. As the case of Uber shows, an issue as apparently tangential as employee status can have a huge impact on VAT liability. It is a complex tax to determine compared to the relatively simpler U.S. sales tax. Definitions are debated and fought over.

VAT, born in Europe, and lifeblood revenue for the EU and European Commission, is an intensely political legal construct. Interpretation is of paramount importance: critical questions and ongoing controversies range from the highly abstract (who is the principal? Where is the place of supply? What constitutes establishment?) to the vividly particular (Is a tampon a luxury item? Does this driver work for Uber or for himself?).

Because the answers to such questions are not to all interested authorities self-evidently self-evident (answers vary widely from country to country), and because much information that is required to even attempt an answer to such questions is not stored in accessible places, it is extremely problematic to turn VAT into a seamless automated process, even in relatively contained scenarios like online marketplaces.

When transactions are complex, and environments are less restricted, the situation becomes worse. At an international VAT conference last year, I heard a senior tax executive (who had been involved in a European Commission initiative to make VAT rulings transparent across the EU) say that it would be 40 years before VAT could be fully automated because of the lack of agreement among Member States about key definitions. And if a definition did look settled, there was no guarantee that it would be applied consistently—even in a single Member State. Too often, interpretation would be driven by a tax authority's needs of the moment. The legal certainties that would provide deep roots for the development of decision trees were not available.

III. Technological Change and a Complex Legacy

There is no doubt that technological change will lead to increased compliance process efficiency, particularly in relation to newer types of anti-fraud reporting (like the Standard Audit File and the forthcoming Immediate Supply of Information system). Governments will begin to construct reporting models which assume the implementation of tech processes that rapidly deliver simple transaction data from trader to tax authority. Why wait for the quarterly VAT return? This should be celebrated. As the global pressure to increase revenue from consumption taxes grows, it's vital that new reporting requirements place as little additional burden as possible on businesses.

The issue will be with the complex legacy of the existing VAT system. One mordant tech specialist I recently asked about VAT technology advised, with a glint in his eye, that he would “start by automating the European Commission.”

Just before Christmas 2016, the European Commission announced yet more plans to reform VAT, including streamlining e-commerce VAT compliance ( The plans will be objected to, resisted, adapted, delayed and possibly rejected by Member States, and are not even provisionally slated to come into effect until 2021. Just to add to the uncertainty, Brexit will have to be navigated in the meantime. The great tech entrepreneur Elon Musk may be sending people to Mars before the EU has an agreed e-commerce VAT framework.

Given the practical reality of the situation, businesses need to take great care when dealing with VAT issues (and revenue hungry tax authorities), or risk suffering a similar fate to Uber. Futurologists may be right to predict an imminent march of the robots into the supposedly cozy enclave of the white-collar professional; but, currently, indirect tax professionals employing methodologies rather than performing algorithms probably offer a safer option than a machine operating alone. The risks are too great. Uber is currently struggling to get fully automated taxi services tested in the U.S. ( who, in this shifting environment, would be so brave as to take a chance on driverless VAT?

Nicholas Hallam is CEO of Accordance VAT, U.K.He may be contacted at:

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