Model reporting rules for online platforms: draft UK regulations

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On October 18, 2022, the UK government released draft regulation to implement themodel rules for reporting by platform operators on sellers in the sharing and gig economy” (Model Rules). UK regulations impose due diligence and reporting obligations on platforms facilitating the provision of services and the sale of goods by sellers resident in the UK or a “partner jurisdiction” (which should include the EU under the DAC 7).

The purpose of the UK model rules and regulations is to target tax non-compliance perceived by individuals and others who provide services or sell goods through online platforms (Sellers). They work by requiring platforms to provide tax authorities with enough information to allow those authorities to perform compliance checks on sellers. This information could then be exchanged with other tax authorities through automatic exchange of information processes.

Although the regulations are open for technical comment until December 13, 2022, they appear to represent established policy in this area and will come into effect on January 1, 2024 – with first reports under the regulations expected by January 31, 2025 .

The regulations rely heavily on the Model Rules, with reference to them throughout. They are also very similar to the equivalent “DAC 7” rules introduced in the EU, which will come into force on January 1, 2023.

Who is concerned ?

Platforms

A platform is defined very broadly – ​​it is essentially any online service that allows individuals or businesses to provide “relevant services” or sell goods to consumers for consideration. A “relevant service” is the rental of real property or means of transport, or the provision of a service involving time or piecework at the request of a user (excluding platform employees). Platforms that only process payments, are search engines, or list or advertise services are excluded.

The regulations apply to “reporting platform operators”, i.e. legal entities that enter into contracts with sellers using their platform, and which are resident, incorporated or headquartered in leadership in the UK. Excluded from this concept are platform operators whose business model prevents sellers from making a profit, or who have no sellers who earn consideration. Online marketplaces for goods, accommodation, ride-sharing apps, car-sharing platforms and freelancing sites will all be covered by the regulations if they have affected sellers.

Notably, there is no de minimis or exemption for start-ups and the UK has not included the €1 million de minimis that applies under the model rules. Even excluded platform operators are required to notify HMRC that they are relying on the exclusion.

Sellers

Reporting Platform Operators are only required to provide data on Reportable Sellers, i.e. registered users of the Platform who are resident in the UK or Partner Jurisdiction and who provide relevant services or sell goods on the platform for compensation.

Occasional sellers are excluded if they sell goods or perform relevant services less than 30 times in a calendar year and receive less than £2,000 in total through the platform.

There are also exclusions for government entities, listed sellers, and sellers who have rented real estate more than 2,000 times on the platform in a calendar year.

What should platforms do?

The regulations impose both due diligence and reporting obligations on platforms.

Due diligence

The regulations require platforms to collect information about sellers and their property listings (if applicable), verify the information collected, and, for each calendar year, identify sellers who are reportable sellers, with potential penalties on the platform up to £100 per seller. for non-compliance.

The due diligence information that needs to be collected is basic “KYC” information – name, address, tax identification number (such as national insurance number or VAT registration number) and date of birth or business number, as well as tax residency (although this may be assumed based on the address provided).

During the consultation, many respondents expressed concern about the additional burden placed on platforms by the verification requirement. The government has decided not to introduce a verification service for the platforms to rely on, so the platforms have to decide for themselves which procedures are sufficient and feasible. For example, this may include uploading a photo of a driver’s license or passport and comparing it to a photo of the seller.

Reports

In addition to regular KYC due diligence information, a platform should also indicate the bank or payment account the consideration is paid into, the total consideration paid for each year, fees, commissions or taxes withheld, jurisdiction of residence of the seller and, for property rentals, details of each property listing and the number of rental days for each property. Insofar as this information is not already collected by the platform, a reflection will have to be carried out on the update of the computer systems. Given the short reporting deadlines (platforms must report data covered by the scope no later than January 31 following the end of the previous calendar year or “reporting period”), platforms may need to -be considering automating their reporting procedures.

The report will need to be written using an electronic reporting system and in a format specified by HMRC – likely to be an XML Schema, which can be resource intensive to set up, especially for smaller platforms .

Several reports

The platform does not have to report on a seller if the operator of the reporting platform “reasonably believes” that another platform operator is required to report the information either to HMRC or to a tax authority in a “partner jurisdiction”, and that it will do so. This does not allow a platform to rely on the report of a competing platform; rather, it is to prevent platforms from reporting in multiple jurisdictions.

EU rules allow a platform to choose to report in a single member state and the UK intends to enter into an equivalent agreement with the EU to avoid the need for double or multiple reporting between the UK and the EU. The platforms will want the UK to reach an agreement with the EU as soon as possible, and ideally before the regulations come into force in the UK. There is currently no indication of the adoption of the Model Rules in the United States.

What does this mean for platforms in practice?

Effect on platforms

Regulations place a significant compliance burden on platforms. Even if a multinational platform already provides reports outside of the UK, they will still need to collect and verify additional seller information. Platforms should determine if they are in scope and ensure they are investing in and preparing adequate internal procedures now. They will also need to closely monitor the domestic implementation of these rules by EU member states for any practical deviations.

The rules are unforgiving for start-ups and small platforms who can ignore the regulations and inadvertently default on their obligations, exposing them to penalties.

Regulation does, however, bring benefits to platforms. First, it is in the interest of the platforms that the relatively simple model rules are implemented consistently across all business models and jurisdictions to create a level playing field – the inclusion of the sale of goods and consistency between model rules, UK regulations and the EU rules are therefore welcome. Second, due diligence and reporting obligations may be preferable for platforms compared to the possible alternative, the imposition of withholding obligations, or even secondary tax liability, for their sellers.

Next steps and relationship with HMRC

Platforms may consider sending messages in advance to their users who may be sellers, advising them that their information will be collected and reported in this way. Many platforms also provide educational material on tax compliance obligations to their users, and the government has promised to provide guidance to sellers to explain the regulations.

HMRC can impose penalties for non-compliance, including a penalty of up to £100 per seller to report for negligently or deliberately inaccurate or incomplete reporting – and taking into account the number of active sellers in the UK however, these sanctions could quickly become significant. While there is a “reasonable excuse” for some sanctions, insufficient resources and reliance on others (e.g. subcontracting some or all of these obligations) are specifically excluded from the “reasonable excuse” .

One of the main criticisms made during the consultation was that the model rules used vague terminology. One of the hopes was therefore that the UK rules would further clarify their interpretation and application. The draft regulations unfortunately do not provide this clarity and in many places simply refer to the model rules with limited modifications. The proposed regulations appear to be a missed opportunity to provide much-needed certainty in this area. The UK has promised “clear and detailed guidance” on enforcement, but this has yet to be released.

The proposed regulations are part of a broader international trend requiring platforms to support their users’ tax compliance. As platforms continue to gain traction in the market, the push for these types of rules will intensify. The platforms will not be able to reverse the trend, but should continue to push for more clarity, consistency and proportionality, as well as enough time to get their affairs in order. Although the UK now has the regulatory freedom to diverge from the EU, the proposed regulations are a pragmatic example of the UK taking an approach that is well aligned with both the OECD and the EU, to remain competitive as a market for innovative companies.

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