Car service Uber is using a gap in EU and UK tax rules to avoid incurring sales tax on the booking fees it charges drivers in Britain, a practise a senior politician said was unfair to competitors and defied the intent of the law.
San Francisco-based Uber charges lower fares than rival ride-hailing apps. In Britain, its competitors' fares include 20 percent value added tax (VAT) on booking fees, but Uber's fares do not.
Uber is able to avoid VAT by exploiting a loophole in how the tax is collected for business-to-business sales across EU borders, which arises because it treats its 40,000 UK drivers as separate businesses, each too small to register for VAT.
It confirmed that it does not pay value added tax on the fees it charges British drivers. By contrast, two of its main UK rivals, Gett and mytaxi, both said they do pay VAT on their fees. They declined to comment on Uber's practise.
The loophole applies in other European countries too, but is particularly important for Uber in Britain which accounts for a third of its European business. Other EU countries have put tighter rules in place to close or narrow the loophole.
Paying VAT on Uber's fees would cost the company about £1,000 ($1300) a year on average for each of its UK drivers, based on information Uber has given about the size of its British business, which is growing rapidly under its expansion plans.
Uber said it respected the tax rules in all the countries where it operated. Asked whether avoiding paying value added tax gave the company an unfair advantage over its rivals, a spokesman said: "The same rules apply to any international service provider with customers in the UK."
Her Majesty’s Revenue and Customs (HMRC), the UK tax authority, declined to comment on Uber, citing confidentiality rules. A spokesman said: "Everyone has to pay the tax due under the law and we make sure they do."
Three European tax experts said Uber's practise probably complies with the way Britain has decided to implement EU rules.
But Margaret Hodge, a member of Britain's Labour Party who has long led parliamentary investigations into corporate tax avoidance, criticised Uber’s practise of not paying VAT on its fees, when told of it.
"It is yet another example of how large companies find loopholes and use the law for a purpose for which it was never intended," she said. "There is a failure to pay tax that should be due. That reduces the money available for public services and is unfair on Uber’s competitors."
The same loophole is used by other companies such as Google and Facebook to avoid VAT on certain transactions involving small businesses, but the benefit is more important for Uber, since the fees it charges drivers are its main source of income.
Even as Uber has become a transportation powerhouse around the world, opponents, including established taxi operators, have mounted legal and public relations attacks on the Silicon Valley company, saying it owes its success to bending the rules.
Several high level executives have left Uber in recent months, and its CEO was forced to apologise after being filmed haranguing one of its drivers. It has hired former US Attorney General Eric Holder to investigate its corporate culture, including accusations of sexual harassment.
In Europe, the lead advocate to the European Court of Justice concluded in May that Uber is a transportation service, not an information platform, and therefore open to far greater regulation.
In the United States it also faces a Justice Department criminal investigation into software used to prevent law enforcement officials from hailing Uber cars, to shield the company from regulators.
Despite those troubles, Uber has been growing rapidly, rolling out its service in new cities month by month.