Whether it’s your child enjoying a tech-enabled educational experience from home, an online retail cash splash, tech-driven banking apps, or even a tech-enabled blood test or health triage, the pandemic has accelerated the tech-enabled services industry in a huge way.
Tech seems so normal these days. It’s embedded itself in our lives. And lurking within the world of tech-enabled consumer services is Value Added Tax (VAT).
VAT (or its equivalent in other countries) is, after all, a business tax on transactions undertaken. It’s not limited to tangible goods or services, and tech-enabled service delivery platforms are no exception to the rule.
Ignore VAT at your peril, we would suggest, but are you aware of the extent to which VAT shapes the foundations of your tech business at the set-up and design phase?
THE BURNING ISSUES FOR TECH-ENABLED BUSINESSES
Whether it’s Fintech, Edutech, Healthtech, Gaming, Betting… whatever the industry, here are the burning issues that can’t be ignored:
1) THE DELIVERY ROUTE
Are you really delivering the underlying service to the consumers, or are you facilitating the service on behalf of another provider (old school speak, are you “agent” or “principal”)?
If you are a principal, then you are truly delivering the service to consumers, and with that comes a need to understand many and varied factors to conclude your VAT reporting obligations, including the liability of the underlying services and the country where they are being provided for VAT purposes.
2) LIABILITY OF SERVICES
You buy in a VAT-exempt education or healthcare service, and your platform enables the onward sale to consumers. You just follow the same VAT liability as your supplier, right?
Unfortunately, life isn’t so simple in the world of VAT. VAT relief attaching to many services often requires the nature of the provider to be taken into account, regulatory approvals, and some reliefs might attach to individual persons providing the service as opposed to a corporate body.
Therefore, buying in a VAT-free service does not mean that you can sell it to consumers on a VAT-free basis. As a principal delivering services to consumers, it is crucially important to understand the nature of the supplies you make as a business so you can determine the VAT liability when you sell them on to the consumer.
3) LOCALITY OF THE SUPPLY
Tech enablement opens up an abundance of new customer channels in countries around the world, presenting a huge opportunity in the commercial sense. However, where do you account for VAT or the equivalent sales tax? Is it where you are established as a company? Is it where your server and outsourced services are located? Is it where your customers are located? This will need to be concluded to understand your reporting obligations.
Typically, B2C supplies are treated as being supplied in your country of establishment. So, if you are established in the UK, you’ve only got to worry about whether you pay tax here. However, electronically supplied automated services are often treated as supplied where the consumers themselves reside, not the UK, which creates a huge challenge.
In principle, you may need to understand the VAT or equivalent sales tax obligations in a whole range of countries, which is something to be avoided where possible.
4) NATURE OF THE SERVICES
The VAT liability of your service and the place of supply (where you pay any VAT or sales taxes) are driven entirely by what you are actually delivering to consumers. This may seem obvious on the face of it, but there are two golden rules to bear in mind:
A) The wrapper of services offered to consumers may often need to meet a variety of tests in order to enjoy certain VAT reliefs. If you are acting as a principal, the design of your holistic offering will need to be considered in great detail to conclude the liability of the underlying supplies you are providing for VAT purposes.
B) If you are marketing to consumers in multiple territories, the design of the offering itself will often impact the place at which you are liable to account for VAT or equivalent sales taxes. Without proper thought, you could be opening yourself up to multiple reporting obligations in a number of countries. Greater thought at the outset on the design of the offering may remove this obligation, leaving you only liable to account for VAT or register for VAT in a single jurisdiction.
5) WHO IS YOUR CUSTOMER?
We’ve seen a number of tech-enabled businesses working together in collaboration. This can have a big impact on the underlying VAT position.
For example, a gaming platform provider may be ready and able to deliver services to consumers in multiple territories. A tech gaming software business may license its offering to that platform provider in return for a royalty fee. This would constitute a B2B transaction which carries an entirely different set of VAT rules to consider.
The true nature of the supply chain for VAT purposes is therefore often misunderstood. Are you truly providing your services to the end consumer, or are you providing them to an intermediary platform that will sell them on to consumers as principal?
HOW CAN COOPER PARRY’S VAT TEAM HELP?
We are working with a number of tech-enabled businesses, supporting them to navigate and mitigate the many and varied issues on the journey from the design phase through to implementation and go live.
Specifically, we support clients by:
- Mapping out the supply chain and underlying contractual arrangements to conclude the agent/principal status and delivery model for VAT purposes;
- Determining the VAT liability of outbound supplies to consumers and opportunities for VAT relief to apply to the services delivered;
- Concluding the place of supply for VAT purposes, and remedies to mitigate reporting and tax obligations in multiple jurisdictions; and
- Compliance support at the operational phase.
