In February 2023, in response to a preliminary issue referred to it by the First-tier Tribunal (Tax Chamber), the CJEU ("the Court") issued a judgment in Fenix International v HMRC, which may have significant practical importance to the e-commerce sector.
VAT Implications – summary
The Court confirmed that certain EU Law provisions are, despite contrary argument, consistent with each other with the effect that digital platforms (including marketplaces) which facilitate the provision of services may be assessed to a VAT liability based on the full amounts paid by customers, rather than merely on the commission charged by the platform to the actual service provider.
This conclusion can be reached on the basis that the platform provider is deemed to be acting as the agent of the actual service provider in facilitating supplies made by those service providers. In effect, as the Court accepts at para 54 of the Judgment, this scenario creates a legal fiction whereby two identical supplies of services are provided consecutively; the service provider, as principal, is considered first to have supplied the service to the digital platform provider (who is the principal's agent), who then supplies that service to the end user.
Background facts in Fenix
To give the above conclusion a practical application, we examine below the background facts of the Fenix case.
Fenix, a company registered in the UK for VAT purposes, operated a social media digital platform called 'OnlyFans' for international and domestic 'users' who were divided into 'creators' and 'fans'. Each creator had a 'profile' to which they upload and publish their content. Fans could access content uploaded by a specific creator by making ad hoc payments or by paying a monthly subscription. Each creator was able to determine the amount of monthly subscription, with Fenix setting the minimum sum payable. Fenix was also responsible for collecting and distributing the payments made by fans and setting out the general terms and conditions for the use of the platform.
Fenix charged 20% commission on any sum paid to creators by their fans by way of a deduction from the gross sum received by Fenix from those fans. All payments appear on the relevant fan’s bank statement as payments made to Fenix.
Throughout the relevant period, Fenix charged and accounted for VAT based on the 20% deduction/commission only.
In 2020, HMRC took the view that Fenix had to be deemed to be acting in its own name pursuant to the above-mentioned EU Regulations and, as such, was assessed as liable to VAT on the whole of the amounts that it received, both the 20% deduction and the amounts passed on to creators.
Fenix subsequently challenged the validity of these tax assessments, arguing, inter alia, that the EU Regulations cited were inconsistent in that they had, by later amendment, gone beyond the scope and limits of the original intention of the Regulations.
Practical Considerations/wider application and implications
In finding that the Regulations were consistent and within the intended scope/limitations, the Judgment brings welcome clarity in respect of the operating legal framework for VAT collection from providers supplying digital services through various online platforms. As a result, we recommend that all businesses in the e-commerce field examine their operating procedures to ensure compliance with their VAT responsibilities.
In particular, we recommend the following:
- Examine carefully the relevant contractual arrangements between parties to ascertain who is explicitly indicated as supplier; and
- Ensure that the necessary conditions to categorise correctly the provider of electronically supplied services are met, including the following:
- that all bills and invoices identify the electronically supplied services and their suppliers; and
- that another person is not explicitly indicated as the supplier of digital services in the circumstances where a provider authorises the charge to customers or the delivery of the services, or sets the general terms and conditions of the supply.
Given the ever-growing nature of the e-commerce sector, the Court's Judgment in Fenix may well have a wide-ranging impact upon platform providers in similar circumstances e.g. car-sharing and accommodation platforms which act as the intermediary between the end user and conventional supplier on a commission-based model but who also set the general terms and conditions of the supply.
Despite the Court's clear Judgment, this is an area of some complexity and there will be nuance given the range of digital services offered across the sector and beyond. Therefore, should you have any queries in relation to the VAT treatment of the supply of digital services, please do not hesitate to contact a member of our Tax Disputes & Investigations Team for assistance.