UK’s Gig Economy Tax Changes

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23/09/19 Economics Reference this

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Analysis of the UK’s Gig Economy

Tax Policy Changes

Introduction

In this report, ‘Gig economy’ encompasses all workers who avoid seeking full-time employment, with the idea of working as self-employed, on short-term contracts.  It occurs when temporary and flexible roles are commonplace in the job market.  It has led to a host of companies leaning towards independent workers over full-time employees. 

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In essence, the ‘gig’ economy allows anyone to be their own boss.  Recently, the UK has experienced an unprecedented level of these types of workers entering the market.  It is generally accepted that this style of employment is vogue in mainly the ridesharing and delivery industries. However, it happens on a much larger scale, this has had an impact on taxation in the UK.

This report will discuss three tax issues which have arisen – Self-employment and National Insurance Contributions (NIC), VAT and Corporate Tax – and aim to shine a light on the issues which have arisen from each tax.  This will be done while looking at how foreign countries have dealt with similar issues, and citing academic research, in support of our argument.

Self-employment

Research done by Citizens Advice suggests that 460,000 people are falsely claiming to be self-employed, leading to a £314 million deficit in taxation due to unpaid income tax and National Insurance Contributions[1].  Since this research was undertaken, changes have been made to the tax system which has enabled the Government to cut that deficit.

With regard to NIC, the current system benefits the self-employed greatly.  In total, when earning over £892 per week, a self-employed worker can expect to benefit from tax allowance up to the value of £1138.80[2] [3] over a calendar year.  As well as there being a benefit for the individual, the business that contracts said individual will incur benefits as well.  When employing an employee, businesses have to pay NIC on their salary of any amount over £162 per week; however, a contracted self-employed, individual allows for a huge saving as contracts for self-employed workers incur zero contribution.  This can allow the business to pay the self-employed worker a greater amount.  Hence, the average worker is far worse than the self-employed.

An area where the Government have aimed to crack down on self-employed workers is with the enforcement of IR35, in which self-employed workers provide their labour through an intermediary; whether this was their own company, a partnership or another individual[4].  Workers would aim to be paid through dividends as their ‘effective’ salary as this incurred a lower tax rate.  However, the Government have said that this ‘effective’ salary must now be taxed as income rather than a capital gain.  The changes aren’t an implementation of IR35, it’s just an adjustment in that the “contractor” has to assess the correct level of tax is being paid rather than the subcontractor[5].  This means that it is no longer the company’s duty to assess the tax on the worker – which would be satisfied if paid into an intermediary – and that individuals have to assess the tax on themselves, therefore this needs to be paid as income tax.  This has the unintended consequence of dis-incentivising highly skilled workers who are near the end of their career as they feel they would no longer receive enough for their time and effort invested and therefore pursue other options.  This does not serve the purpose of the enforcement of IR35 as its aim is to bring in more taxation, not drain some of the experienced knowledge which can be invaluable for all company types and industry sectors.

Value Added Tax (VAT)

There are over a million workers in the gig economy and this number is constantly rising, another tax challenge created is that of the Value Added Tax (VAT).

The gig economy has created a multitude of unpaid tax liabilities, and the HMRC may be ready to use new tax dodging laws to crack down on start-ups and their self-employed workers. One case that is very helpful in this situation is that of UBER. According to  APPG (2018)[6], for the purposes of VAT, UBER has argued that it acts on behalf of the driver as a booking agent, therefore classifying drivers as their own entity and not a part of the company.  This allows VAT to go unpaid as businesses don’t pay VAT unless they earn over £85,000 per calendar year, an amount which is considered out-of-reach for a taxi driver[7].  Furthermore, they argued that the taxable supply of transport made to the customer is not supplied by them but rather by the self-employed driver which means they classify themselves as a technology company.  This has been disputed greatly by regular taxi firms and ride-matching services, which are commonly used by licensed taxi drivers.  In 2014, a professional taxi drivers’ association in Barcelona filed to seek clarification over whether the Spanish branch of Uber used misleading practices and unfair competition in their business approach.  The court said that they would first need to establish what type of company it was, before judging the association’s claim.  After a three-year legal battle, The Court of Justice of the European Union (CJEU) proclaimed that Uber was a transport provider and therefore had to abide by the regulations set by individual member states[8].  As it stands, Uber complies with VAT, however, if the Government removed the £85,000 VAT threshold for motorised transport services, it would force Uber and their drivers to comply, which would support the licensed taxi industry.

Corporation Tax

Corporation tax is one of the main tax sources of government. UK economy has grown significantly, therefore, companies have been benefited from economic growth. Financial Times (2019)[9] illustrates that during the 2016-17 financial year, the UK government raised £56 billion from corporation tax revenue, which was a 21% increase on the previous year. Although corporation tax has brought considerable revenue to the UK government, there is hidden income from cash-in-hand jobs known as the gig economy.

Mishcon(2019)[10] recently illustrate HMRC data that approximately £4.4 billion of tax was uncollected from self-employed jobs. The existing systems were not designed to collect tax from multiple income streams. For instance, based on Bowers (2019)[11], London based Uber business paid merely £411,000 tax in 2015 while the taxi business had turnover £23.3 million. According to Caldwell (2019)[12], 60% of self-employed under-report income and taxi drivers are among those most likely to under-report income. There is evidence showing that Uber taxi drivers and Deliveroo workers receive tips from the customers in hand, thus the companies are also difficult to monitor their self-employed workers and the company profit will be affected adversely.

Furthermore, Uber is taking the advantages of the loophole in EU and UK tax rules to avoid incurring sales tax on the booking fees it charges Uber drivers in Britain as well as avoiding to transform its current tax structure to controversial tax structure with the intention of maximising its profits (Tom, 2019)[13]. Bowers (2019) shows that Uber denies they are generating a massive profit owing to the fact that they made a loss in the global market and the majority of the revenue operated by their technology goes directly into the Uber drivers but not the company. Moreover, in some situation where taxpayers do not totally understand their compliance obligations, the tax loss attributable to this hidden economy is unknown.

Solutions

To sum up the above issues, the labour market is changing and this has caused some issues to arise with taxation. Issues mentioned above includes the exploitation of loopholes in taxation law such as labour opting for self-employment instead of being employed in established corporate firms to avoid paying NIC. Issues also include the collection of the corporate and value-added tax as some companies claim that they are not entitled to pay the corporate tax due to the nature of their operation. Other issues include the fact that the law in taxation has not caught up to the change in labour market hence there is no clear guidance as to the tax base, tax rate and taxpayer. All these issues have resulted in the loss of tax revenue for the government.

 Gig economy has caused issues with NIC, (AAT, 2019)[14] says that from UBER alone, the government has lost NIC of 150m+. UBER is not the only company that is guilty of this issue. A possible way to resolve this issue is to set up a system similar to the PAYE system according to (Giles, 2019). Not only will this system ensure that every individual pays their tax but it may also help to resolve the VAT collection issue. However, this might increase the prices as VAT will be another 20% on top of the price, this may result in sudden inflation in some sectors of the economy in the short run. Personally, I think the system should be linked to an individual’s bank account so that money can be deducted from their bank account regardless if they are being paid by electronic transfer or by cash. Apart from that, it takes care of the welfare of the employed as it ensures that they are not faced with a tax debt at the end of the tax period.

 Besides, HMRC can attempt to come up with a clearer guideline to bridge the gap between legislators and society.  Firstly, legislators should consider abolishing the distinguishing between employee and worker, (Adam, Miller & Pope, 2019)[15] defined them differently and are treated differently. By eliminating the differences between them, there is a lesser complication in their taxation treatment. Furthermore, it will reduce the mindset of labour seeking gig employment just to avoid tax. Similarly, clearer definitions need to be implemented to the corporate level. VAT and some taxes are currently problematic as firms are able to use loopholes to their advantage.

To add to that, tax legislation can be very specific and difficult to comprehend. As legislatures, tax authorities should attempt to design a simple system and provide guidance to users of the system. (Ofili, 2019)[16] highlighted that having multiple sources of income has resulted in confusion for some taxpayers in terms of compliance and mistakes in the declaration of income.  A possible solution to this issue may be to set up a tax calculator that is user-friendly and provides detailed instruction as to what constitutes as an income and relief. When the difference in treatment and tax system is simple and understandable, compliance by taxpayers including corporate firms should improve.

Lastly, the attitude of the government towards the emerging labour market and the economy has to change in order for parties involved to work together to minimise tax avoidance. (Mardiste, 2019)[17] wrote an article on Estonia embracing the gig economy and supporting its development. Government and corporate should follow this example set by Estonians to come to an agreement with the tax and tax collection system. The article supports the idea of the PAYE system suggested above. The system would be able to access a person’s account to debit or credit wherever appropriate for a tax collection or tax relief. If the government and corporate firms work together to resolve this issue, it may be possible that tax can be simple and can be collected with ease.

Conclusion

The above report discusses the issues of existing laws and regulations in the gig economy pertaining to self-employment, VAT and corporation tax.  This report suggests some improvements to the UK tax system that are evidenced by academic articles and the policies of foreign countries.

The existing UK tax system provides, what could be seen as, unfair benefits to self-employed workers. One of which is that people with an average weekly wage above £892 will receive £1138.80 more than employed individuals. , the business who provides the platform for the self-employed worker also receives the benefit, with nil NIC costs incurred. It creates more benefits which will flow to self-employed workers.  In addition, IR35 was issued by the government in order to crack down entities who distribute earnings in form of dividends for reducing tax.  However, it also discourages older workers who are about to retire and does not serve the purpose of raising taxes.

The rapid development of the gig economy has led to a large number of unpaid tax obligations in society, especially VAT. The existing tax system has loopholes that companies like Uber exploit. This is enabled by the CJEU who stated that Uber must comply with the laws of the country they are operating in; the lax UK system has allowed them to undercut taxi licensed drivers and enlarge their market share.

In summary, HMRC should provide a clear, simple and comprehensive guidance on the use of different tax methods for employees and self-employed. For workers with diverse sources of income, a tax calculator should be used to distinguish income and reliefs.  This makes it easier to determine their tax bill and further decreases the deficit between the expected and actual yield in terms of income tax and NIC’s from ‘self-employed’ workers.  The Government should reduce loopholes which enable firms operating to their favour.  If it enforced a VAT charge on all journeys as well as the so-called ‘Google tax’ which prevents companies from diverting their profits away from the country they are made in, the Government would bring in more tax income and support licensed taxi drivers, one of the most established and important industries to the UK.

Bibliography


[1] Osborne, H. (2016). Uber loses right to classify UK drivers as self-employed. [online] the Guardian. Available at: https://www.theguardian.com/technology/2016/oct/28/uber-uk-tribunal-self-employed-status [Accessed 13 Feb. 2019].

[2] Anon, (n.d.). [online] Available at: https://www.gov.uk/national-insurance/how-much-you-pay [Accessed 1 Feb. 2019].

[3] GOV.UK. (n.d.). Self-employed National Insurance rates. [online] Available at: https://www.gov.uk/self-employed-national-insurance-rates [Accessed 1 Feb. 2019].

[4] GOV.UK. (n.d.). Off-payroll working through an intermediary (IR35). [online] Available at: https://www.gov.uk/guidance/ir35-find-out-if-it-applies [Accessed 2 Feb. 2019].

[5]Butterworth, B. (2018). Budget 2018: Here’s what the IR35 changes mean for self-employed workers. [online] inews.co.uk. Available at: https://inews.co.uk/news/politics/budget/ir-35-changes-self-employed-workers-budget-2018/ [Accessed 2 Feb. 2019].

[6] APPG (2018). Retrieved from https://www.appgresponsibletax.org.uk/wp-content/uploads/2018/06/20180615-Building-a-Fairer-System-Tax-and-the-UKs-Gig-Economy.pdf

[7] Bergin, T. (2017). Exclusive: Loophole allows Uber to avoid UK tax, undercut rivals. Retrieved from https://www.reuters.com/article/us-uber-tax-britain/exclusive-loophole-allows-uber-to-avoid-uk-tax-undercut-rivals-idUSKBN18Y1Z8

[8] Lomas, N. (2017). Blow to Uber in Europe as top court rules it’s a transport service. Retrieved from https://techcrunch.com/2017/12/20/blow-to-uber-in-europe-as-top-court-rules-its-a-transport-service/?guccounter=1

[9] Ft.com. (2019). Riddle of UK’s rising corporation tax receipts | Financial Times. [online] Available at: https://www.ft.com/content/ca3e5bd2-2a7e-11e7-9ec8-168383da43b7 [Accessed 4 Feb. 2019].

[10] Mishcon de Reya. (2019). Tax and the gig economy. [online] Available at: https://www.mishcon.com/news/publications/inside-disputes-8/tax-and-gig-economy [Accessed 4 Feb. 2019].

[11] Bowers, S. (2019). Uber’s main UK business paid only £411,000 in tax last year. [online] the Guardian. Available at: https://www.theguardian.com/business/2016/oct/10/ubers-main-uk-business-paid-only-411000-in-tax-last-year [Accessed 4 Feb. 2019].

[12] Caldwell, S. (2019). 60 per cent of self-employed under-report income to HMRC. [online] Business Advice. Available at: https://businessadvice.co.uk/tax-and-admin/year-end/60-per-cent-of-self-employed-under-report-income-to-hmrc/ [Accessed 4 Feb. 2019].

[13] Tom, B. (2019). Exclusive – Loophole allows Uber to avoid UK tax, undercut rivals. [online] Available at: https://uk.reuters.com/article/uk-uber-tax-britain/exclusive-loophole-allows-uber-to-avoid-uk-tax-undercut-rivals-idUKKBN18Y1Z6 [Accessed 4 Feb. 2019].

[14] AAT. (2019). Retrieved from https://www.aat.org.uk/prod/s3fs-public/assets/The-Gig-Economy.pdf

[15] Adam, S., Miller, H., & Pope, T. (2019). Retrieved from https://www.ifs.org.uk/uploads/publications/budgets/gb2017/gb2017ch7.pdf

[16] Ofili, M. (2019). Tax and the gig economy. Retrieved from https://www.mishcon.com/news/publications/inside-disputes-8/tax-and-gig-economy?publication=true&utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original

[17] Mardiste, D. (2019). Embracing Uber, Estonia shows tax needn’t be an issue. Retrieved from https://www.reuters.com/article/us-estonia-uber/embracing-uber-estonia-shows-tax-neednt-be-an-issue-idUSKCN0YV1PS

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