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Platforms Are Evil, Please Use Platforms – 3rd Jan 2021

-- 9 min read --

There are often concerns that introducing new regulation can end up favouring the ‘big guys’ while hurting new entrants into a particular market.

Even where regulation applies to everyone equally, at least on its face, the fear is that larger companies can more easily afford any associated compliance costs than smaller businesses.

A new UK regulation related to VAT (sales tax) on products being bought from overseas suppliers by people in the UK provides an interesting example of how this dynamic can work.

You can read all the gory details on the UK Government website but in essence this is an attempt to make sure that UK sales tax is always charged on goods sold to people in the UK irrespective of where the vendor is based.

For UK businesses, registering with the UK tax agency, collecting VAT on sales and remitting them to the government is a normal part of business (just as companies in other countries have to register with their local authorities).

The novelty in this regulation is that the UK government is saying that businesses in all other countries who sell to UK customers should now also register with the UK authorities, collect and remit the right amount of VAT, and keep records of all their sales to UK customers for years.

This is not entirely related to Brexit but is obviously spurred on in part by the fact that there are many EU-based businesses who have customers in the UK but are no longer part of a common set of sales tax collection arrangements now that the UK is out of the EU.

You may think this is reasonable – the UK government has a right to these sales taxes and businesses in other countries should not be able to avoid them and undercut local enterprises.

I am not going to debate the pros and cons of different models for online sales taxes in this post but am rather interested in the way that the new rules explicitly call out the role of online marketplaces.

Online marketplaces (OMPs), where they are involved in facilitating the sale, will be responsible for collecting and accounting for the VAT.

For goods sent from overseas and sold directly to UK consumers without OMP involvement, the overseas seller will be required to register and account for the VAT to HMRC.

Changes to VAT treatment of overseas goods sold to customers from 1 January 2021

If we imagine a small business in a country like Germany that has a small but loyal customer base in the UK, who they want to keep serving, then we can see that these new rules present them with an interesting choice.

They can go through the effort of registering with the UK tax authorities and figuring out how to comply with all the duties this brings, including keeping detailed records for many years.

Or they can shift to selling through an online marketplace who will do all of the work of “collecting and accounting for the VAT” on their behalf.

I know which option I would take if I wanted to get on with running my business.

{NB they could also stop selling to UK customers at all which might open up a gap that a UK business could fill, or in the case of specialist products just leave their UK fans without any options].

So here we have a regulation that is more or less directly steering people to use large online platforms rather than dealing with UK customers directly.

This is happening now in the UK but many countries are likely to want to do something similar as they look to ensure they are maximising their collection of sales taxes.

And they will likely also be attracted to offering an online marketplace collection option as this is going to be much simpler to operate and help them meet their revenue goals.

This is illustrative of a broader dynamic that drives regulation towards favouring large platforms.

Fig 1 – to enforce against Consumers, Producers or Intermediaries?

When a government wants to regulate activity over the internet – whether this relates to tax, or harmful content, or data, or a host of other concerns – then it can look to do this in three places.

First, the regulator can enforce against Consumers – these are all of the individual users who buy goods or access content online and live within the government’s jurisdiction.

In the VAT example this would mean collecting the tax directly from each person who buys goods from abroad.

Second, the regulator can enforce against Producers – these are all the entities that produce the physical goods and digital content that is being consumed by users.

This is provided for in the VAT regulation when it offers vendors the opportunity to register with the UK tax authorities and comply directly with the new commitments for selling to UK Consumers.

[NB Online services may allow people to act as both Consumer and Producer so these definitions can feel blurred but for each individual transaction it will generally be clear what role a person or entity is taking in that exchange.]

Third, the regulator can enforce against Intermediaries – these are the (typically large) platforms that sit between communities of many Consumers and Producers who have signed up to use them.

In the VAT regulation, these Intermediaries are called ‘online marketplaces’ and a handy definition for what this covers is provided.

HMRC’s definition of an online marketplace is a business using a website or mobile phone app (such as a marketplace, platform or portal) to handle the sale of goods to customers which meets all of the following conditions:

– in any way sets the terms and conditions on how goods are supplied to the customer

– is involved in any way in authorising or facilitating customers’ payments

– is involved in the ordering or delivery of the goods

Changes to VAT treatment of overseas goods sold to customers from 1 January 2021

We might see this regulation as burdensome for any entity that meets this new definition as it means they will now be responsible for the UK VAT affairs of their vendors, but for the larger platforms at least this is likely to be quite straightforward for them to implement.

On the flip side, the compliance costs will be proportionately much lower for an online marketplace operating at scale than they will be for any single business following the individual registration route.

It seems fair to characterise the effect of these new rules as steering businesses towards trading via platforms because of this disproportionate cost impact, justifying the concerns about the pro-platform impact of regulation.

Beyond Commerce

The collection of tax is an especially compelling requirement for governments so we might think that eCommerce services are a special case, but there are reasons to expect similar dynamics to play out for other kinds of online service.

We are seeing a raft of legislative proposals intended to reduce potential harms from online services that will also create new compliance requirements for services that are distributing digital content rather than physical goods.

Under these new rules we can expect regulators to require online services to implement a range of measures to keep people safe, for example verifying user age before certain content can be shown, or using technology to identify and remove harmful content.

These regulations may not explicitly define an ‘Online Marketplace of Ideas’ in the way that the tax rules define eCommerce platforms, but some of the same compliance dynamics may apply.

If you are a small content producer looking to reach an audience in the UK, then you may in future face a similar choice to that of the eCommerce service today – to register with the UK regulator, Ofcom, and comply directly, or to promote your content via a platform that is already registered and compliant.

As well as form-filling (and potential fees), you may not have the complaint-handling systems, content filtering technology, age verification controls etc that the UK regulator is now expecting and the costs for you to do all this will be much higher than giving a cut to a platform to do it for you.

You might decide to ignore all of this, just as a business could decide they are not going to bother with the new UK VAT regime when they ship goods, but the UK government may then feel it is entitled to try and block access to your service from people in the UK.

Regulators Prefer Platforms

The dynamic driving the shape of regulation is that it is hard to scale regulatory enforcement and the internet works at scale.

Where governments want to intervene, they will often prefer to regulate a small number of large platforms directly, and have the platforms enforce rules against the mass of individual users and businesses.

This is not just a question of governments being ‘lazy’ or not wanting to spend money on regulators but the regulation-via-intermediary model may be the only one that can get them close to meeting their goals.

eCommerce platforms should be able achieve near-complete VAT compliance, and large content platforms should be able to remove most content the regulator has defined as harmful.

The best-equipped regulator in the world would not be able to get to the same levels of compliance if they have to play whack-a-mole with millions of individual online services.

[NB Those who feel that innovation depends on there being some rough spaces that escape regulation may see this as a good argument against governments enforcing via platforms].

Platforms Grow With Regulation

The trend in policy circles is towards increased regulation of the internet and it is hard to see how this can have any effect other than to drive more small independent entities into relationships with large platforms who can ‘help’ them with their compliance requirements.

The platforms will make money from each of these relationships – they are not doing it out of charity – but this will be cheaper for any individual customer than them having to do it themselves.

Unless there is some radical shift in thinking away from costly regulation at all then it seems probable that ever increasing amounts of online business will happen through platforms that work at scale.

To go back to the example of the small German business faced with the new UK VAT rules, they might prefer to avoid large platforms like Amazon, but their fallback would be to find an alternative online marketplace to sell into the UK rather than going it alone.

We might see the growth of ‘barebones’ online marketplaces where the intermediary does little more than the basic compliance work for a range of vendors who do not want to operate through a large platform brand, but these might struggle to be competitive.

And while a company might just choose to avoid the UK today, this will become a bigger issue as these sales tax collection models spread, and other regulations kick in affecting their markets.

They will then either have to revert to selling only locally (for a German business this would include the whole of the EU at least), or find a global platform that can do the compliance for them.

Adios Open Internet?

A core element of the internet’s founding philosophy is the notion that you can create a service anywhere in the world, hook it up, and build relationships with people everywhere.

The world I have described in this post is going to seem like a depressing departure from this model – a ‘re-intermediation’ of activities which the internet had dis-intermediated.

The model of direct, unregulated connections will continue to be possible for some activities, especially for smaller entities that may be either explicitly exempt from new regulations or fall under the radar of the enforcement bodies.

But for some types of business the writing is clearly on the wall and our efforts may be most usefully directed towards thinking about what kind of platforms we want to deliver them, rather than assuming they can thrive without intermediaries.

For example, the EU has already imposed new regulatory requirements on online video services that will shape how they have to be delivered, and is working on new rules that will impact all kinds of content publishers.

Concerns about data protection law compliance may also drive more people into the arms of large platforms, though this may seem counter-intuitive given the widespread regulator interest in platforms like Google and Facebook.

There are new data protection laws being created in countries around the world all of the time, and many online services may be entirely unaware of their legal obligations even though they have customers in those countries.

As regulators become more active in enforcing data protection law then the compliance burden for a small service with customers in many countries may become significant, not just in terms of cash cost but because tweaks have to be made to products for eg different consent requirements.

Small services will face the same choice I described earlier – shoulder the compliance costs, shift to an already compliant platform, or stop serving customers in some places.

We will no doubt see some tough decisions from data protection regulators for the large platforms but, once the dust settles, they will have the benefit of being able to show that their compliance has been tested, and that they have (presumably) made any required changes.

For the small online business who wants to make sure they are collecting and using data lawfully, there will be an attraction to using a platform that has the resources to meet complex, global compliance requirements.

Closing Thoughts

That was something of a journey from a small technical piece of UK tax law to a future for the internet that is even more dominated by platforms.

But it is by looking at the effects of specific pieces of regulation, and putting ourselves in the shoes of the people who have to comply with them, and enforce them, that we can understand where things are heading.

When you do this, it seems clear that governments are regulating in ways that increase the role of large platforms and incentivise more people to use them.

This is another area where we can hear inconsistent messages coming from policy makers – they worry about platform power and yet are busy creating laws that will only increase it.

There is no simple answer to this as both things are of interest to governments – achieving their regulatory goals and cutting platforms down to size – which makes it an interesting problem for regulate.tech.

One Comment

  1. This has been going on for several years for digital sales. It was a nightmare when it came in because the governments hadn’t realised that there were individual sellers. They thought everyone sold through platforms.

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