Uber's VAT bill finally comes due
The company is now pushing to make cabbies pay the 20% levy as well
For the fourth quarter and full year ended Dec. 31, 2022, Uber reported strong results, with footnotes. For instance, this hefty note on net cash and free cash flow (emphasis added):
Net cash used in operating activities was $244 million and free cash flow, defined as net cash flows from operating activities less capital expenditures, was $(303) million. Through 2022, net cash provided by operating activities was $642 million, and free cash flow was $390 million. Net cash from operating activities and free cash flow during Q4 2022 and full year 2022 were impacted by a cash outflow of approximately $733 million (GBP 613 million), related to the previously disclosed HMRC VAT claims settlement in the UK. Excluding this settlement, free cash flow would have been $430 million and $1.1 billion in Q4 2022 and full year 2022, respectively.
Back in November, Uber announced it had settled a dispute with HMRC, the UK tax regulator, over unpaid VAT (value-added tax). VAT in the UK is a tax on most products and services, usually at the rate of 20%. It’s similar to sales tax, but it generally only applies to businesses that do more than £85,000 (about $103,000) a year in revenue.
Uber historically avoided paying VAT in the UK by claiming that since its drivers were independent contractors running their own small businesses, not employees, the liability for VAT lay with each individual driver rather than with Uber the corporation. Eighty-five thousands pounds is quite a lot of money in the UK, where median annual pay for full-time employees was £33,000 ($40,000) for the tax year ending April 2022 and just £22,200 ($26,800) for taxi and cab drivers and chauffeurs. As most Uber drivers weren’t crossing the VAT threshold, little to no VAT was collected on Uber rides and services.
Tax compliance is hardly a sexy topic, but the nuances of VAT and employment classification are key to understanding how Uber built a successful business in the UK. We talk a lot about how Uber spent years subsidizing its ride-hail service to keep prices artificially low, in a massive transfer of wealth from venture-capitalists and other private investors to the ride-hailing public. But in the UK, dodging VAT was also a big part of how Uber bested the competition.
In 2017, Reuters reported that Uber wasn’t charging 20% VAT on its fares, compared to then-local ride-hail competitors Gett and mytaxi who were. Reuters also estimated that paying VAT at the time would have cost Uber roughly £1,000 a year for each of its 40,000-odd drivers, or upward of £40 million a year. Uber’s VAT sleight-of-hand might have remained a niche issue except that it was inextricably tied to a much higher profile topic: the employment status of Uber drivers.
In the UK, as in much of the rest of the world, some drivers challenged Uber’s decision to classify them as independent contractors, arguing that Uber asserted too much control over their work for them to truly be considered independent. But the UK case was more interesting and had more potential to succeed than similar lawsuits in the U.S. because of the UK labor system.
Uber drivers don’t neatly fit into the category of employee or independent contractor, which in the U.S. are the only two options. The UK, however, has a third choice known as ‘worker’ that sits right in the middle. Workers don’t run their own company or have their own clients, but might work for one employer on a casual basis. They have some flexibility but might be supervised by a manager during periods of employment and get their supplies and tools from the workplace. Workers are entitled to the national minimum wage and statutory minimum paid holiday (28 days in the UK! I know! Incredible! Get yourself a UK work schedule!), among other benefits. They don’t have as many protections as employees, but they have a lot more than the self employed and contractors.
In October 2016, a UK employment court ruled that Uber drivers should be classified as this third category of ‘workers’ rather than self employed, in response to an employment classification suit brought by two drivers. The ruling was filled with dry British snark from judges who were unamused by Uber’s contorted arguments, including one remark from the tribunal that, “Reflecting on the Respondents’ general case, and on the grimly loyal evidence of Ms Bertram,1 we cannot help being reminded of Queen Gertrude’s most celebrated line: The lady doth protest too much, methinks.”2
Labor advocates hailed the decision as groundbreaking. Uber appealed, and the case filtered through the court system for a few years. In February 2021, the UK supreme court dismissed Uber’s appeal, siding with the original employment tribunal ruling that Uber drivers were workers. Having lost at the highest level, Uber announced the following month that its more than 70,000 UK drivers would be reclassified as workers with the national minimum wage and paid holiday time, and that it had set up a process to settle historical claims over holiday pay and minimum wage liabilities, with compensation hearings to take place in 2022.
Buried by the flurry of excitement over the supreme court ruling but nonetheless relevant were the tax implications. With UK drivers officially deemed workers and not self employed, Uber could no longer argue that the liability for VAT lay with individual drivers who typically earned below the £85,000 threshold rather than with the company itself. Uber would have to start paying VAT, and settle a large tab with HMRC. Nonprofit the Good Law Project estimated Uber’s unpaid tax bill at around £1.5 billion and pushed the government to collect on it.
In March 2022, Uber fares rose sharply in the UK as Uber began collecting and remitting 20% VAT. That increase followed a separate hike a few months earlier designed to get drivers back on the road after pandemic-induced shortages. In November, Uber announced it had settled with HMRC, and would hand over £615 million ($743 million) in the fourth quarter to resolve outstanding VAT claims from before March 2022. Not nothing, but a lot less than it could have been.
Which brings us back to that footnote on yesterday’s earnings report, about how if not for the HMRC VAT claims settlement, Uber would have posted $430 million in free cash flow for the fourth quarter and $1.1 billion for the full year. Or, as I translated it, “if we'd been paying VAT like we were supposed to all along, maybe we’d have had more free cash flow last year, but also maybe not because not paying VAT for years helped us keep prices low and overtake black cabs and our other ride hail competitors, plus we got a great deal on the settlement, all of which is priceless.”
Meanwhile, Uber has gone back on the offensive, suing Sefton Council, a local government district in Liverpool, in a case aimed at forcing taxi companies to also pay VAT and have to raise their fares accordingly. Unlike Uber drivers, private-hire taxi drivers remain classified as self employed, meaning their operators can avoid VAT in the same way Uber did for years. In other words, Uber is now losing at its own tax-dodging game, and risks being undercut by taxi operators who can charge lower fares because they don’t have to collect and remit VAT. Uber doesn’t want that, so once again it’s back in court—just this time, on the other side.
Joanna Bertram, then Uber regional general manager for the UK, Ireland, and the Nordic countries.
Hamlet, Act III, sc. 2, also footnoted by the judge, in a valiant effort to teach the American tech bros some goddamn Shakespeare.