EU VAT for the platform economy: Why ‘unfair’ rules could be set to change

In certain industries, including hospitality and transport, some businesses are facing a competitive disadvantage due to “unfair tax treatment” within the platform economyThe platform economy is built upon the growing tendency for businesses - especially retailers - to use digital platforms and marketplaces to sell goods or services. Such platforms are underpinned by computer systems and allow companies to more easily reach and connect with prospective consumers with the intention of completing sales..

That’s the view of Carmen Muniz Sanchez, Head of Sector in DG TAXUD’s VAT Policy Unit, who said in a recent interview with the European Commission that proposed changes to VAT within the EU will bring new-age digital companies in line with traditional competitors.

What is the platform economyThe platform economy is built upon the growing tendency for businesses - especially retailers - to use digital platforms and marketplaces to sell goods or services. Such platforms are underpinned by computer systems and allow companies to more easily reach and connect with prospective consumers with the intention of completing sales.?

In recent years, a series of online platforms have emerged to bridge the gap between suppliers of certain services (most notably short-term accommodation and private transport) and consumers. Suppliers are often small businesses or individuals looking to, for example, rent out an apartment who enlist the services of a platform to facilitate this.

These platforms are now of vast size and scale and provide major competition to traditional providers of similar services, such as hotels and airlines.

What are the current VAT rules for the platform economyThe platform economy is built upon the growing tendency for businesses - especially retailers - to use digital platforms and marketplaces to sell goods or services. Such platforms are underpinned by computer systems and allow companies to more easily reach and connect with prospective consumers with the intention of completing sales.?

Current VAT rules within the EU state it is the duty of the supplier of services who is obliged to collect and remit VAT. This means within the platform economyThe platform economy is built upon the growing tendency for businesses - especially retailers - to use digital platforms and marketplaces to sell goods or services. Such platforms are underpinned by computer systems and allow companies to more easily reach and connect with prospective consumers with the intention of completing sales., it should be the people or businesses providing services who take responsibility for VAT – not the platforms themselves.

However, many suppliers are unaware of their VAT liability for the services they provide. And even when they are aware, acquainting themselves with the VAT system and ensuring compliance with various regulations is often difficult.

As a result, hotels, airlines and other traditional providers face competition from platforms that are not liable for tax and are supplied by people who may not realise they are required to collect and pay VAT. This allows them to process thousands or even millions of bookings, many of which are not taxed and therefore contain a price cut not available to many more established suppliers.

What does the EU plan to do about it?

In December 2022, the European Commission proposed a series of measures to modernise the EU’s VAT system with specific reference to the platform economyThe platform economy is built upon the growing tendency for businesses - especially retailers - to use digital platforms and marketplaces to sell goods or services. Such platforms are underpinned by computer systems and allow companies to more easily reach and connect with prospective consumers with the intention of completing sales..

The new regulations would clarify that short-term accommodation rental is not exempt from VAT in the EU and that accommodation and transport providers must ensure the tax is collected and remitted on the sales they facilitate when the underlying supplier has not done so (such as in cases where the supplier is a small business or an individual person).

It is anticipated that the changes would restore equality to these markets and close the VAT gap currently found within the platform economyThe platform economy is built upon the growing tendency for businesses - especially retailers - to use digital platforms and marketplaces to sell goods or services. Such platforms are underpinned by computer systems and allow companies to more easily reach and connect with prospective consumers with the intention of completing sales..

What’s more, the Commission’s official estimates show it should drive an annual increase in VAT revenues for member states of €6.6 billion across each of the next 10 years.

A similar scheme is already up and running in Canada and is operating smoothly and effectively.

What do the experts say?

Speaking to the Commission’s newsletter last month, Carmen Muniz Sanchez said there is currently a problem with the interpretation of VAT rules and who is responsible for paying it, but “the end result is the same – VAT is not being collected consistently”.

“Many small businesses and even individuals rent out apartments and even their own homes using these platforms,” the expert explained.

“Imagine if all these people had to register for VAT and comply with accountancy and VAT rules. It would be very difficult, to put it mildly.

“That’s why our proposals don’t compare the individuals renting apartments with hotels. We compare the platform itself to a hotel, in the sense that a hotel might have a hundred rooms and then you have platforms which list hundreds of offers in the same city.

“So in our proposal, we suggest that the platform be considered the ‘deemed supplier’ – meaning that it is the platform itself that will collect the VAT on behalf of the individual user and remit that VAT to the member state authorities.”