Gearing up for digital platform reporting: The pitfalls and grey areas facing the digital economy

From home delivery curry to cleaning, cab rides and other personal services, digital platforms connect millions of consumers with thousands of restaurants, entrepreneurs and holiday property owners across the country.

The resulting connectivity provided a lifeline for businesses that might have otherwise had to shut down entirely during lockdown. And while volumes have dipped slightly since, these transactions still make up a significant proportion of the world’s platform economy.

The tax challenge of the digital economy

A digital platform is an app, website or other type of software that connects sellers to the consumers of their goods and services. While these digital platforms have the potential to stimulate new forms of economic activity and increase efficiency, tax authorities are worried that they could also lead to undeclared income and a lack of compliance with basic tax rules.

Using the OECD’s model rules for reporting by platform operators as the foundation, the EU has introduced DAC7 (which went live on 1 January 2023). The UK followed suit with the MRDP regime which came into effect at the beginning of 2024.

The new rules put the onus on platform operators to collect, verify and report key data on the sellers that trade through them, so tax authorities can track economic activity and investigate discrepancies. The information includes the seller’s identity, their address and their tax identification number. By 31 January of the year following identification, the platform operators need to report on each seller’s transactions through its platform. Platform operators are also required to share with sellers the information that they have reported to the tax authorities.

Platforms that exclusively process payments aren’t covered by the new rules. There are also potential carve outs around thresholds, albeit these are extremely low as the intention is to cover a wide range of platforms.

What activities are within scope?

The definition of what constitutes a digital platform under these regimes is intentionally broad, going beyond activities such as online marketplaces, ride hailing and food delivery companies. As a result, many of the “platform operators” who could be within the regime’s scope may not realise that their activities fall within these rules.

Take loyalty schemes as an example. Few would instinctively put themselves in the category of a digital platform, but they may well be covered if points are earned and then redeemed at third-party sellers.

Similarly, while there are exemptions for operators supplying goods or services in their own name, the concept of “indirect” facilitation means that such businesses can still potentially be in scope, even where they take legal title to the goods or services being supplied.

Even a corporate group that establishes an online procurement portal to allow third-parties to sell goods or services directly to group companies, or a company that provides infrastructure to be used by its franchisees (whether in or out of the group) could be in scope.

The concept of personal services causes particular difficulties, as it can be unclear when an activity is sufficiently “personalised” to fall within the scope of the rules, and sectors such as wealth management can be within this umbrella.

And we could go on. The big question for your business is: how to establish whether or not you’re covered by these rules?

Validation

While the platforms will have to report financial information to HMRC, much of this should be accessible from your ERP system. What DAC7 has shown is that the bigger challenge for businesses is validating the accompanying data that the platforms must report in respect of their sellers.

For some platforms, this is likely to require material changes to the onboarding process. The challenge is how to secure the necessary information and verify this without creating so much work for the seller that they’ll get frustrated and take their business elsewhere.

But there are also potential benefits to this. Platforms that handle seller engagement well by creating the right balance between systematic compliance and a trouble-free onboarding and updating can turn MRDP into a source of differentiation. The key is being clear about what information is required, and then setting up fast and efficient electronic processes to capture and validate it.

Risk of falling behind

Looking again at DAC7, platforms starting late find themselves having to backfill information and play catch-up on onboarding and validation. This has not only heightened the strains on their own systems, it has also added to the work required by sellers, especially if they’ve been given limited time to respond.

The other big risk of ignoring MRDP and similar regimes is a build-up of cumulative penalties. Under MRDP the penalty on the platform is up to £100 for each seller where the reporting platform operator fails to apply the procedures. But this can quickly mount up given the volume of sellers on many platforms, especially if the operator falls behind on the necessary identification and validation.

In summary, review, preparation and implementation all take time – the more businesses know about what’s involved, the more they realise they have to do.

Three ways to get up to speed

With MRDP now live in the UK and the reporting deadline for DAC7 in the EU nearly upon us, how can you get up to speed? Three priorities stand out:

1. Check through your business

Take stock to identify the in-scope activities (for both DAC7 and MRDP) and the information required from sellers. This process should not only establish what activities fall in or out of the regime, but also document your conclusions and their justifications.

2. Allow enough time for design and delivery

If activities are in scope, carry out a gap analysis to check what information is already collected by your systems and what additional areas will need to be added.

In parallel, you can contact sellers, help them to understand what you need and why you need it, and put in place an audit trail of verification and documentation.

With these foundations in place, you can move quickly to design systems and processes for information collection, validation and reporting.

Even if you haven’t started yet, you can still catch up by acting now to establish what is in scope, what information is required and how best to engage with your sellers.

3. Ease the strains

If you operate a small or midsize platform, you may not have the systems or big enough team to handle this extra layer of compliance. MRDP may be the catalyst to consider a different back office model such as managed service support, either to assist with implementation or run this and other routine demands on your behalf.

Let’s talk

If you would like to know more about MRDP and DAC7 and how they could affect your business, please feel free to get in touch.