DST18500 - Online Marketplace – the Main Purpose Test

The second marketplace condition will only be satisfied when a main purpose of the service is to facilitate the sale by users of particular things.

This section sets out how HMRC interprets the main purpose test. In HMRC’s view the intermediation of sales between third parties is the essential and defining characteristic of an online marketplace. However, it is also a very broad concept and some services which would not commonly be regarded as an online marketplace will possess some intermediation between third party users.

The second condition is therefore designed to focus the definition by asking whether the online service is really an online marketplace. It does this by testing whether this defining characteristic of intermediation outlined above is a central feature of the online service or not.

The other terms in the provision are intentionally broad and designed to cover all types and variations of online marketplaces. This means there can be challenges in interpreting how the provision should apply in borderline cases and certain situations.

The answer will always depend on the particular facts and circumstances of the online service. However, this page outlines common indicators HMRC views as relevant in determining whether a service is an online marketplace.

Accounting

The way that revenue is recognised in the financial statements can be an important indicator of an online marketplace. Marketplaces will not recognise the consideration paid for a product or service purchased on the platform in its accounts as revenue because the performance obligations to provide those goods or services will rest with the third-party user selling via the platform. The marketplace’s performance obligations will be limited to arranging for these goods or services to be provided by the third party.

If the provider of the online service acts as a principal and recognises the purchase price of goods or services sold through the platform as revenue in its accounts, this is a strong indicator the online service is not an online marketplace.

Building a large population of sellers

Online marketplaces will normally seek to attract a large population of sellers providing goods or services on the online service. A large population of sellers is essential to most online marketplaces as it maximises the choice of goods and services available to the customer and ensures the online marketplace has the liquidity available to satisfy customer demand. This can often result in significant economies of scope and scale for the marketplace provider.

Many online marketplaces will also have relatively low additional marginal costs per seller operating on the platform so significantly increase volumes of sellers operating on the online service without substantial increases in its cost base.

As a result, online services with a small number of third party sellers operating on the service are less likely to have a main purpose of facilitating transactions between users, especially if the provider also has substantial economic activities which are unrelated to the facilitation of these sales, for instance if it sells its own goods or services through the online service.

However, there are some limits to this general rule of thumb.

• Some marketplaces facilitate a particular type of transaction. In these cases, the number of sellers operating on the platform will be dictated by how competitive the market in those products or services are.
• While marketplaces will generally want to increase the volume of sellers, they will also want to maintain the quality and relevance of the things offered on the marketplace.

Competition between sellers

As the name suggests, online marketplaces are markets where sellers compete with one another to meet the customer demand. They may be in direct competition for the customer demand, for example through setting prices, trying to achieve priority listings on the platform or generate favourable customer reviews.

Some online marketplaces may determine the price of the service offered through the online service or otherwise limit the ability of sellers to differentiate themselves from other sellers. In such cases, it is useful to examine the extent of competition between those sellers.

In some online marketplaces, the provider will still promote competition between sellers by seeking to establish multiple sellers of a particular product or service in a particular area.

However, in other cases there may be very limited competition. This might be the case when the services provided by each user are so different that they are non-substitutes. In these cases, it less likely the online service will meet the second condition.

Spatial dimension

There will typically be a spatial dimension to most online marketplaces, in the sense there will be a recognisable ‘place’ or online portal where goods and services are offered for sale.

This factor in isolation is not determinative either way, but it can be helpful to consider in some cases. This principle is best explained by highlighting a couple of examples at either end of the spectrum.

Business A operates an online portal. Third party sellers upload their items for sale on the online portal. Customers are able to use the search tools on the portal to apply filters that identify items matching requirements.

In contrast, Business B provide services which enable its customers to provide their services online. It provides website and payment technology solutions which allows its customers, usually independent shops, to sell their goods online.

While Business B may technically enable its customers to sell particular things, it would not normally be viewed as an online marketplace. One of the reasons for this is there is no identifiable place through which it facilitates these sales.

Consequently, an online service is more likely to be an online marketplace where customers (i.e. users on the demand side) are able to visit a single location (e.g. a website or an app) where goods and services are offered for sale.

Features of the service

In order to facilitate sales, online marketplaces will generally have features which make it easier for customers to find the products or services they require. For example, there will normally be features which allow users to search for items based on their requirements.

These features are likely to be present too in an online retail business. As a result, the mere presence of these features alone does not suggest an online service is an online marketplace. Nonetheless, the absence of such features may be a useful indicator the online service does not have a main purpose of facilitating transactions between users.

Correlation between revenues and number of transactions

Online services are more likely to be considered online marketplaces when the online service’s revenue is linked to the number and value of transactions concluded on the online service.

For example, many online marketplaces will charge a commission fee on successful transactions or a flat fee for each item listed on the platform. It follows that the marketplace’s remuneration will be linked to the volume of transactions taking place on the platform.

Services which are solely funded by flat access fees are less likely to have a main purpose of facilitating transactions between third party users.