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Hubert Horan sent on two important stories on Uber, neither of which bodes well for this taxi company dressed up as a tech play.
The first is by the estimable Izabella Kaminska of FT Alphaville, who has been dogging the question of Uber’s VAT tax liability. Recall that Uber lost a ground-breaking employment tribunal ruling in 2016 over whether its drivers were employees and therefore entitled to protections like minimum wage and national insurance contributions. Uber appealed and lost, and is now appealing to the Supreme Court.
While litigation is a crapshoot, coverage of the initial ruling against Uber strongly suggested its odds of winning an appeal were low.
And that means that the implications of Izzy’s report are even more dire than her even-handed account would suggest. She features this section of Uber’s UK accounts for 2018, filed just this week:
The critical bit is buried in the middle of that dense paragraph, in which Uber ‘fesses up that it is in talks with the tax man, HMRC, over the fact that if it loses its case on whether it employs drivers (and is therefore a transportation company and not a tech platform), it will owe back VAT of 20% on its “Gross Bookings”. Her sources say Uber would likely owe £1 billion if not more. Oddly, the accounts don’t show a contingent liability.1
Izabella focused on the bit in the text above about Uber’s “ongoing dialogue” with HMRC. Her sources tell her Uber thinks it is negotiating with HMRC. But HMRC does not negotiate:
But a source tells Alphaville the view at Uber seems to be that the company sees itself as in negotiations with HMRC, with a view to settling the case before the all-important outcome of its UK Supreme Court appeal regarding its employer status is determined.
The other issue is the nature of the exposure and HMRC’s overall responsibility to capture its full extent….
HMRC told Alphaville:
We don’t comment on identifiable businesses. HMRC will always make sure that every business, no matter its size, pays all the taxes due under UK law and we don’t settle for less.
Most of the article discusses the wee problem facing HMRC, that it can’t ding Uber for taxes until it actually loses that Supreme Court case, and then there is a four year statute of limitations. However, there is a legal step HMRC could take and oddly isn’t, which in the US is called tolling, as in pausing the statute of limitations.
However, very big UK legal guns are trying to get to the bottom of this and embarrass HMRC to Do Something. Again from the story:
One course of action according to Jolyon Maugham QC, who fronts the Good Law project — a non-profit that seeks to support progressive law change in a way that reduces public distrust of the establishment — is for the tax authority to engage in something called a protective assessment as soon as possible. This would allow HMRC to protect its position by flagging that an effective inquiry has begun, in turn allowing it to seek back-taxes from four years before that point even as more time passes.
In Mr Maugham’s opinion it would be a failure of governance at HMRC for the authority not to have issued such an assessment as soon as it was made aware of the issues at stake, irrespective of the pending nature of the all important employer status appeal.
When Mr Maugham made this view known to HMRC back in March in a letter before action, however, the authority’s view seemed to be that it would need to wait until the case was determined to do so. And so, in bid to get to the bottom of the legalities of the situation, the Good Law Project announced on May 29 of this year that it would be suing HMRC via judicial review for failing “to stem losses due to Uber’s tax dodging.”
It is Mr Maugham’s contention that up to £1.1bn of tax is at stake. You can read Mr Maugham’s witness statement, which offers more details on how that figure is arrived at, here.
Remember, that £1.1 billion is back taxes; if Uber continues to do business in the UK, it will have to pay 20% going forward too. Wonder how long it will take US analysts and reporters to ask about this potential big hit.
Iszabella cheerily concludes: “It’s a tax case ..with equally important implications for Uber’s operations in Europe, which also bear similar VAT exposure.”
Earlier this week, Uber took another blow that went largely below the media radar. From an October 8 press release:
James River Group Holdings, Ltd. today announced that it delivered a notice of early cancellation, effective December 31, 2019, of all insurance policies issued to its largest customer, Rasier LLC and its affiliates. All insurance policies related to this customer are included in the Company’s commercial auto line of business within its Excess and Surplus Lines segment, and a majority of the insurance policies were due to expire on February 29, 2020.
“This account has not met our expectations for profitability, and we think it best to terminate the underwriting relationship as of year end,” said J. Adam Abram, Chairman and Chief Executive Officer of James River.
As Hubert pointed out:
Rasier is the Uber subsidiary that handles the insurance for its drivers. Notice that this isn’t a notice of tighter terms or higher rate but a complete termination of all policies.
The Wall Street Journal picked up on the significance:
“James River is one of four insurers Uber works with in the U.S.–the other three are Farmers Insurance Group, Progressive Corp. and Allstate Corp. James River insures the ride-hailer’s drivers in 20 states, D.C. and Puerto Rico,” a spokesperson for Uber said. The company anticipates bringing on another insurer to replace James River but didn’t provide details.
First, we have no idea what these 20 states are. Uber’s best margins come from a handful of cities like San Francisco and New York. If it’s any of the states where Uber has a lot of business, this development is more significant than just losing one of its four carriers.
Second, the fact that James River up and quit suggests that it tried putting through a rate increase and Uber balked.
Third, the fact that James River quit will give the other carriers leverage, not just regarding pickup up the James River business (even assuming they want to do that) but also with their current policies, which presumably are repriced annually like most P&C insurance.
So Uber’s posture that it could bulldoze regulations is finally starting to come home to bite them. Of course, it would be nice if they had a path to profit too.
1 Izabella notes that in the UK, tax matters are considered private, but it still seems a stretch not to give some estimate of the contingent liability, say by putting it in a category with other contingent risks. It also seems hard to fathom how Uber could fail to include this liability in US securities filings given strict disclosure requirements.