Internet Business: Commerce and Tax
is the second edition of the well received e-commerce: law, business and tax planning
. In the ten years which have passed since the first edition was published and the dotcom bubble burst, tax has been a constant issue for all internet based businesses and transactions. This book examines the direct tax and VAT issues relevant to all the important areas of internet business.
We are now witnessing a spectacular explosion of internet based businesses. Retailers are having to adapt to the opportunities and challenges of the marketplace, by creating and protecting a presence on the global market, and meeting the demands of supplying goods and services within an international market.
This not only mark a radical transformation within our society, but also how we advise internet businesses.
This book provides a much-needed overview of the main tax issues that are involved in carrying on internet business. Essential reading for:
- In-house advisers
- Solicitors and barristers specialising in tax and IT law
- Practitioners in commercial firms advising on business matters
- In-house lawyers employed by businesses seeking to generate revenue through the commercial exploitation of the internet
- Accountants advising these businesses
- International tax planners
Preface of Internet Business: Commerce and Tax
Over ten years have passed since the first edition, and tax remains a constant issue to be considered for all internet-based businesses and e-commerce transactions. This book examines the corporation tax and VAT issues relevant to the important areas of internet business. It also considers potential tax issues for shareholders in an internet-based company. The first edition coincided with the dot.com bubble bursting in a spectacular fashion in 2000, but we are now witnessing an equally spectacular resurgence in internet-related business activity: for example, in 2011 the Russian search engine Yandex raised over US$1.3 billion from its initial public offering (IPO) and the business networking site LinkedIn was valued at over US$4 billion from its IPO. Ebay announced that mobile commerce is likely to generate almost $5 billion in merchandise volume in 2011 for the company. Facebook has also launched the process for its IPO, which will raise $5bn, giving the company a value of $80bn.
Since the first edition we have also witnessed an explosion of internet-based business and social networking opportunities (such as Facebook, LinkedIn and Twitter), which have marked a radical transformation in how our society communicates and interacts (eg Facebook has some 845m monthly active users). All of this has been achieved with considerable leaps in the development of technology, such as smartphones, which provide access to telecommunications and the internet and so enable us to download digital content from anywhere in the world. All of this facilitates most forms of commerce via the use of information technology.
The internet has marked a dramatic shift in consumer behaviour, specifically a move away from high street shopping to one-click internet shopping from the comfort of our home and workplace. Retailers have had to adapt to the opportunities and challenges of the marketplace by creating and protecting a presence on the global network, and by meeting market. The internet provides an electronic portal to both domestic and international markets, which depending on the nature of the supply may represent the provision of services electronically (eg by the downloading of electronic content relating to books, films and games) or the provision of goods by delivery through the retailer or a commercial intermediary.
HMRC is launching a campaign, which is planned to begin in Spring 2012, to encourage traders using e-marketplaces to pay the taxes owed on their activities in circumstances where they are currently delinquent. The necessity to launch a campaign targeting e-traders illustrates the extent to which the e-marketplace has exploded in growth, with the consequential risk to the Treasury of lost revenues where traders fail to pay their taxes.
One reviewer of the first edition commented that, ‘this is a useful book; it is a practical guide to the problems of electronic commerce and centres around taxation’. Another commented: ‘On the whole, this guide takes a practical approach to the subject and provides practitioners with a good overview of the main tax issues that have evolved.’ I hope that the second edition has at least met this benchmark, and that it will provide a first point of reference to matters on taxation of internet business, so that it aids those new to the whole area, whilst also acting as a point of reference for more experienced advisers. The second edition has involved writing new chapters, and considerable updating and reworking of existing chapters to reflect changes in law and the evolution in e-commerce activities, and the sophistication of the issues involved. The current edition of this book is divided into the following principal parts:
- Part I. This part provides a general overview of the nature of internet business and e-commerce activities. It also provides a summary of the components of the information technology world that underpin the commercial activities of e-commerce.
- Part II. This part provides an overview of the main business structures used to carry on the activities referred to in Part I. It also examines the types of commercial intermediary used to carry out activities in a supply chain. A summary is also provided on contract formation and governing law for commercial contracts.
- Part III. This part provides an examination of the principal direct tax issues that arise for internet business and e-commerce transactions where carried on by a company (which will tend to be the main business form).
- Part IV. This part provides an overview of share-based employee incentives for private technology companies, and the tax issues arising for employee and director shareholders.
- Part V. This part provides an examination of the principal VAT issues that arise for internet business and e-commerce transactions.
- Part VI. This part provides a case study in relation to how an actual internet business is carried on using IT. The case study relates to Just-Eat.co.uk and illustrates the supply chain from IT and commercial perspectives.
We do not cover issues relating to UK customs and excise duty, which are beyond the scope of this edition.
I am grateful for the support of my colleagues at Bird & Bird LLP, in particular the comments of Mathew Oliver and Adam Singer (on direct tax issues), and Caroline Brown (on VAT issues) on the draft of this edition. I am grateful for the contribution of my colleague, Colin Kendon (assisted by Fleur Benns), without whom Part IV would not have existed. Chapter 9 on transfer pricing has been materially enhanced by Shiv Mahalingham agreeing to update it with the benefit of his immeasurable experience. Many thanks to my colleague David Gent, who reviewed Chapter 2 on structures for internet business; and to Adam Gillert who kindly provided comments on Chapter 4; and thanks to Felicity Passmore for help with proof-reading. I would also like to thank the Just-Eat team for contributing the case study at Part VI, and, in particular, Mike Wroe and Marcus
Jennings for their time in discussing the Just-Eat business model.
I would like to acknowledge the help of my publishers in preparing this edition, in particular, thanks to Kate Hather for deciding to commission it.
Finally, I would like to thank my wife, Katherine, for her support and encouragement during the long period it has taken to write this edition.
Needless to say, responsibility for any errors and omissions is mine. While all reasonable care has been taken in the preparation of this publication, this book should not be relied upon as a substitute for legal or other professional advice (such as valuation advice) which should be obtained before implementing any new transaction and business structure. Please note especially that tax law and practice can change rapidly and the application of tax law to any particular situation may not be straightforward. The authors would be happy to assist in these situations. Julian JB Hickey, January 2012
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