The FT reports this morning that:
When you book an Airbnb room in London, around a third of the $100 saving you make over the price of an average hotel room is due to tax advantages that favour Airbnb's business model, according to research by the Financial Times.
The extent to which Airbnb's business model benefits from tax advantages is particularly evident in London because the UK has high rates of business property taxes and value added tax on hotel stays, combined with generous tax exemptions for owners renting rooms in their homes and for small businesses.
VAT and property taxes account for up to 17 per cent of the price of a typical London hotel room after the recovery of VAT paid on costs. The VAT on most Airbnb stays can be as little as 0.6 per cent because the UK only levies the tax when businesses sell more than £83,000 per year – a threshold reached by very few Airbnb hosts. It is otherwise only payable on Airbnb's booking and service fees.
So, it is exploitation of the tax system that is creating Airbnb's price advantage.
It is not alone in this: Uber does much the same thing. It too has claimed to act as an agent for the sales of independent third parties - its drivers. The result has been that because Uber drivers are not VAT registered nor does much of what Uber charges reflect VAT due. That may, and I think should, change now it is known that Uber drivers are workers: the logical consequence of that is that Uber should be liable for VAT due on journeys it arranges. The issue will involve many, many millions of VAT before resolved.
And this responsibility for VAT is also an issue with Amazon and eBay where despite new legislation there is little indication that effective action is being taken as yet to stop traders who clearly cannot be paying their taxes due for using these platforms. During the last month or so I was shown details of companies that had been struck from the Register of Companies without ever filing accounts still trading on one of these platforms.
We have then a situation where fundamentally honest businesses are being undermined by agency models of selling via the internet where the agent legally denies responsibility for the operation of taxes due and as a consequence some at least is either avoided or evaded. The agents will do doubt be acting in accordance with legal advice that says everything they are doing is legally sound. I am not suggesting otherwise. But then, all tax planning works on the basis of such advice: it provides a safety net when legal challenge from a government arises. If opinion has been secured it is not possible to say that the agent has been reckless and so tax penalties cannot usually be charged.
The opinions are, then, like tax risk insurance. But the fact that they will exist (and I am certain they will: it would be reckless for them not to be) suggests that those operating in this way are knowingly operating in areas of legal uncertainty. The risk was not created when asking for the opinion: the choice to take the risk was when making the commercial decision to compete on the basis of a potential tax advantage that ultimately provides a price advantage to drive business, whoever might have saved the tax.
Three things follow. First, this means these are precarious business models. If the law is changed as I think it must be (and Brexit will make it much easier to change VAT law to tackle such abuses) then the tax advantage can be removed. This means there is no certain sustainable value in these models.
Second, in the meantime business that is committed to adding value within the economy is undermined, and I think few can argue that this is not the case, meaning that this basis of competition has a real long term cost.
Third, the loss in government revenue combined with the uncertainty of collecting tax from those who for whom these platforms act as agents increases the risk of a growing UK tax gap, which is then used as an excuse to undermine the provision of essential services in the UK, spreading the risk and uncertainty resulting from the use of these already unstable trading arrangements.
The conclusion is that whilst I cannot dispute that tax can be used as a basis for short term economic competition I can also unambiguously suggest that the outcomes are almost wholly negative.
So what to do? Three things. First, make the platform the principal in the transaction in all cases. That will mean it is responsible for the VAT due on the sale.
Second, make the platform responsible for the product sold. So, it is responsible for the safety and insurance of the Uber car, the safety of the Airbnb property, and so on.
Third, deny tax relief to the platform on the payments it makes to its suppliers if it cannot prove that they are registered for tax. In addition, require that they provide full information on payments made to each one to HMRC. That way the risk of evasion is greatly reduced.
What after that? I think more steps might be required. These models do not also contribute to local communities the way traditional businesses have by paying business rates, for example. The chance that an online additional sales tax might be required to manage this clearly needs to be investigated. I won't be doing that here though.
I am not saying these measures solve the problems of artificial tax competition. But they do help address them. And that is essential: current models of online selling are likely to prove to be deeply and negatively disruptive to the UK economy. Urgent action is needed. But will a government bogged down in brexit notice?
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I fully endorse your concerns and your ideas.
However, avoiding tax is now part of our British culture it seems – especially amongst the middle class with whom I spent the New Year in London.
In a similar vein it always amused me that profit in Stock Loan operations is in part created profit by shifting dividends to low tax jurisdictions.
I don’t hear the left talking about the lack of tax (ie none) from social landlords and explains why they can also be cheaper?? Given a study I read stated social landlords on average are 16% cheaper and so with rates between starting at 32 and 45% I rest my case they are in more expensive given that exemption. Although where I live the ever so delightful YMCA (you know the caring folk who house homeless youth) have increased there rent from £220 pw week a few years back to £300 and no its not london if that was a privite landlord it would be flagged as extortion!
Sam
Rents are cheaper in the public sector (in my case Council houses) not because we are not taxed but because of the following reasons:
1) When we apply for part funding from the Government for new homes they insist on our rents being no more that 80% of market rents for first lets. The Government insists on that. Got it? Good.
2) When we raise the rest of our money as a loan from the rent for existing homes (called the Housing Revenue Account) because we are a none profit making body, we can spread out the pay back period for the loan up to 30 years – this enables us to keep rents low as the payback period is longer. We are not allowed to make any profit – no shareholders, no bonuses right? If we have a surplus it is reinvested in the housing stock Got that? There’s a good chap.
And other things are far from rosy.
When the single room LHA rate for single persons come in this year, even one of our 1 bed flats will be too expensive for one of these people so we are now faced with building even cheaper homes (i.e. smaller) to accommodate them or they will be on the street.
Social landlords face a different tax as for 4 years since 2015 as we have to cut rents by 1% each year because of George Osbourne. This means that we have had to revise our ability to build new homes to meet demand downwards.
I have also worked with the YMCA. Did you know that around 8 of 10 of their properties are trashed by the troubled young people they house? No wonder their rents are so high because of having to cover the cost of all the damage.
However Sam – please do not feel obliged to have to consider any of the facts above. You are after all entitled to have opinions.
Well I dont know about you one of the housing association heads had a salary of £500k. Not so fast regarding the LHA that applies to only private landlords social are ‘still’ entitled to get whatever they charge in rent. That was going to change but as yet has not been passed (else the local ymca would not be able to get £300 pw). Plus social landlords only built 11k homes last year they sure as hell are not doing much in scope (especially as the biggest made a operating profit of £300 million last year). Even when they build homes they cost double what some private builders would charge according to a channel 4 report. The larger ones are also doing ‘Landbanking’ which only private developers get blames normally. Trashing property? And the same does not applies to a private landlord?? Further I may be wrong here but I could have sworn I read a guardian article (typically anti private landlord) that said imparting that social landlords also get a grant from goverment to cover tenant damages. I’m sure there are good social landlords, but many, many on the left act like there is no good private landlord and all have pots of money, many seem to think there is no rogue tenant at all.
Are you in a fact free world?
Prove why social landlord housing costs twice private equivalent houses, for example
People used to take out adverts advertising B&Bs and rooms to let in the local paper.
If those people qualified for rent-a-room relief or were under the VAT threshold and so could offer rates less than hotels, no-one blamed the local paper for creating an ‘unfair’ advantage or called for massive and illogical changes in our tax system.
I guess people recognised back then the difference between someone renting out a spare room, a small B&B and a large hotel chain offering services and facilities far above the first two.
So now these same adverts appear on Airbnb and you claim it’s some massive tax scam that Airbnb are at the heart of? Weird.
The only weirdness is that you can equate the two
But Airbnb don’t benefit from no VAT or the rent-a-room scheme. It’s the people letting the rooms who do. So Airbnb are not exploiting anything. And for those letting the tax position is the same as always.
How would it be different if instead of an ad on Airbnb it was an ad in exchange and mart?
Airbus is hardly a new concept. AutoTrader has been online for years.
No, Richard. You need to answer the point made here and above instead of adopting this emperor’s New clothes approach by loftily dismissing questions you seem to have no answer to. People do you the courtesy of well constructed arguments. Do the courtesy of replying.
With respect no one has ever thought they bought a car from Autotrader. They do think they rent from Airbnb. They have no clue who the real renter is until such time as the contract is far advanced. To pretend the relationships are similar flies in the face of what is obviously happening. What you are presenting is not argument, it is just simple refusal to accept an obvious reality.