HMRC AND THE EMPLOYMENT TRIBUNAL
INTRODUCTION It has come to our attention that certain dispatch systems’ methodology for recording card transactions from the customer has become a cause of concern for some of our clients. So far, we have seen the negative impact that this can have in employment law matters and with tax investigations with HMRC.
CONTEXT
Under normal circumstances, when a customer elects to pay for their journey by card payment, they are still considered a ‘cash customer’ from the point of view of the driver and operator. That is to say, the driver is entitled to the full amount for the journey as if the customer was paying in cash. Here, the operator is only acting as an agent on behalf of the driver to facilitate the card payments.
EXAMPLE 1 To follow an example, customer A elects to pay £10 for a journey booked through operator B by card, driver C completes the booking. Here, operator B collects the £10 card payment from customer A. Once the payment has been processed and received by operator B, operator B will transfer the £10 to driver C in a timely manner.
This example demonstrates that the card transaction was never a source of income for operator B. The operator mere- ly facilitates the processing of card payments on the driver’s behalf. In many instances, this facility is provided for the drivers at the financial expense of the operator.
The issue arises when a dispatch system automatically records these card transactions as an account customer on its system, for example ‘Card 1’. At first glance it may seem insignificant, however, should the method of recording such transactions be scrutinised by a potential worker status claimant’s (a private hire driver’s) legal representative or HMRC, this creates a potentially problematic scenario.
EMPLOYMENT LAW From an employment standpoint, we have seen claimant’s legal representatives attempt to focus on the nature of these transactions. As discussed above, card transactions from ‘cash customers’ are not usually income for the operator. We have seen legal representatives attempt to utilise this flaw in a dispatch system in an attempt to create a compare and contrast situation with Uber and Addison Lee. The purpose of this is to strengthen the claimant’s argument by compar- ing the processing and control of card transactions, then comparing them to account customers.
As you are aware, account customers are usually tendered by the operator (as principal) and subcontracted to licenced PHV drivers. The rationale is that account customers’ rates are dictated wholly by the operator, thus reducing the
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driver’s possibility to earn more. Failure to distinguish card transactions from account customers can leave the operator vulnerable to adverse inferences that the operator exerts substantial control over a driver. This has become even more relevant due to the Covid-19 pandemic, whereby less customers are willing to pay in cash.
VAT INVESTIGATIONS More worryingly, should an operator undergo a VAT investi- gation from HMRC, it is more than likely that accounting for card transactions as an account customer will be extremely problematic.
Looking at Example 1, we can establish that the £10 collected by operator B is the driver’s, it is not income for operator B. This is the usual practice throughout the industry.
EXAMPLE 2 ‘Dispatch System 1’ records the £10 card payment from Example 1 to an account ‘Card 1’. Card 1 appears to the untrained eye to be an account customer.
An issue arises with VAT if HMRC believes that card transac- tions recorded as account customers, such as ‘Card 1’ above, are in fact income for the operator. HMRC will expect 20% VAT on these payments.
In Example 1 this would cost operator B £1.66 in VAT for money they never even received as income. When you take into account how many card payments an operator processes nowadays, this could lead to a staggering VAT liability.
CONCLUSION
• We suggest that operators familiarise themselves with how their own dispatch system records card transactions.
• We also suggest that operators need to be aware of HMRC’s current thought process in relation to the processing and recording of card transactions; and to be able to sufficiently explain and demonstrate the collection of these payments, and the distribution of such payments to the driver who completed the booking.
• By doing so, an operator should be able to demonstrate to HMRC that the potential card transactions in question have never formed a supply of income to the operator.
If you have any questions or require any assistance with this matter, please do not hesitate to contact us on: 01743 298460 or email:
admin@taxilaw.co.uk
JUNE 2021
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