Platforms could face £10m bill from tax changes branded as ‘horrible as FATCA’

Platforms could be hit with a £10m bill in order to make sure they comply with new EU tax rules, the Tax Incentivised Savings Association (Tisa) has warned.

Tisa technical director Jeffrey Mushens said the incoming EU VAT law, which goes live in January 2015 and is aimed at online businesses, could impact platforms if they are drawn into scope by the legislation.

The new law aims to close tax loopholes exploited by telecommunications firms.

But fears platforms could be included under this legislation have led Tisa to canvass its members and ask HM Revenue and Customs (HMRC) to lobby on its behalf.

It will meet with HMRC later this month to discuss the issue.

The potential impact has been likened to the US’ Foreign Account Tax Compliance Act (FATCA), which created a large back office burden for wealth firms with US clients. The Association of British Insurers and the British Bankers’ Association are also understood to have raised concerns.

Mushens said initial assumptions platforms will not be affected have changed: “It has come as a big shock to everybody,” he said.

Under the revised EU law, which would have to be accounted for in next April’s tax returns according to the EU’s timetable, VAT must be charged based on the end user’s location rather than that of the supplier. Tisa is seeking clarification on whether platforms will be classed as e-businesses, and if so whether an exemption for financial services companies will apply.

In a pessimistic scenario, UK platforms could face responsibility for not only tracking the movements of existing non-UK EU clients, but also those who move overseas in future, having to then charge VAT in line with local laws.

One platform told Tisa if the tax was introduced it could cost it £2m to build a compliant system, a further £20,000 in VAT per year, and £200,000 in administrative costs.

Mushens said: “If this platform is representative I would think it would cost platforms roughly £10m to build systems in total. The VAT rate is going to be trivial but compliance costs will affect the industry.”

Platforms are likely to pass on any costs incurred, he added: “Only one person ever pays for anything – the customer.”

There is some good news for platforms, as HMRC is understood to be aligned with Tisa on the issue, and has pledged to raise concerns with the European Commission and other EU member states.

Nonetheless, the issue would cause a huge headache for platforms, on a scale not seen since the industry’s preparation for FATCA.

International Financial Data Services (IFDS) group executive David Moffat said: “This would be every bit as horrible as FATCA if it comes in, especially if it is applicable not only to existing clients, but those who choose to move abroad in future.”

“You are talking about having to identify all the occasions where you have clients who are no longer domiciled in the UK. That is not always easy, especially if they have a UK accommodation address.

“Then you have to establish what the local tax rate would be, and after that you have got to work out how to report to the local tax authority. It could get horribly messy. The problem is the time scale is really short.”

A number of platforms confirmed they are examining the issue, although views differ in terms of which parts of the legislation may apply.

David Tiller, head of adviser platforms at Standard Life, said discussions his company has had with HMRC and the Treasury appeared to confirm activities remain exempt in the UK, on the basis they are financial services.

Hargreaves Lansdown senior analyst Laith Khalaf said there is a lack of clarity in the proposals: “The question surrounds whether services provided to European clients who are based overseas are subject to the VAT rate of the UK, or the home country of the client.”

While the vast majority of UK platform clients are domestic, he warned the proposals may cause “an administrative headache”. He added: “This could be overcome if HMRC were to act as a central hub for the administration and collection of overseas taxes.”

The main issues for platforms

▶ Whether platforms will be classed as e-businesses.
▶ Whether financial services transactions are included in new rules. HMRC has said the vast majority will be exempt, but platforms await specific confirmation on the issue and have requested further meetings to clarify.
▶ Some EU members, including the UK, offer financial services exemptions, but others do not. Platforms and other UK financial trade bodies are pushing for a consistent approach.
▶ The EU plans to put out further guidance ahead of 2015, when the law comes into place.
▶ How much time there is to prepare. The first VAT returns are due in April 2015.