The gig economy has been part of modern life for some time. In the gig economy, instead of a regular wage, workers are paid for the “gigs” they do. Our reliance on workers in the gig economy has increased significantly since the pandemic began. Many businesses and consumers rely on gig workers to deliver goods as lockdown restrictions limit tradability in the usual way.
In addition, due to Covid-19, many people who were dependent on income from permanent employment have turned to gig work to supplement or replace their main source of income.
Another labor market disruption was caused by the recent UK Supreme Court ruling that Uber drivers were “employees” (rather than self-employed) and entitled to basic workers’ rights, including minimum wages and a company pension. To be in line with the ruling, Uber recently announced that it would classify its drivers as workers from March 17, 2021. Given that many platform vendors are asking to be mere intermediaries, this shift raises some interesting questions for other tech companies in the space.
Many welcome the disruption caused by the gig economy, while others are concerned about the long-term implications and tax challenges it poses for governments around the world.
Why is worker status important?
Employee status is important as it affects an individual’s employment rights and the way in which they are taxable.
There is a plethora of case law designed to establish tests and principles to determine whether a person is an employee or an employee. If none of the tests pass, then a person is likely self-employed – that is, an independent contractor who runs his own business, rather than an employee or salaried employee. Those who fall into this category have very few rights.
The Supreme Court in Uber relied heavily on the Autoclenz Limited v Belcher judgment, which clarified that all existing agreements must reflect reality. This means that while the signed contract may contain the characteristics of self-employment, the economic reality of the relationship between the parties must always be taken into account when determining employment status.
From a labor law perspective, only employees are entitled to all statutory labor rights. This means that an employee cannot seek unjustified dismissal or statutory severance pay. However, those classified as workers are entitled to some important legal rights, including those related to the national minimum wage and annual paid leave, and these come with a cost.
Another right that drivers were entitled to in Uber based on the employee status decision was protection from whistleblowing. The whistleblowing law protects workers from dismissal and victimization. Whistleblowers are particularly vulnerable in the gig economy because of the way they get work. Therefore, this additional protection can lead to a further review of the working practices of platform providers.
Income tax
The term “employee” is widespread in statutory labor law. However, it is currently not recognized by the UK tax authority HM Revenue and Customs (HMRC) as the UK tax system either classifies individuals as employed and therefore subject to Pay As You Earn (PAYE) tax or self-tax – employed and so taxed by self-assessment .
While the income tax rate is the same for employees and the self-employed, self-employed people only pay tax on their profits and not on total income, so they can deduct any relevant expenses when calculating the total taxable amount. In addition, when trading through a company, profits can be made through dividends or annuities, which can result in lower tax payments.
The self-employed also pay less than National Insurance Contributions (NICs).
In contrast, the relationship between employer and employee is simple: taxes and NICs are collected by the employer at source through the PAYE system.
According to an analysis by the Institute for Fiscal Studies, around 19% of UK tax revenue comes from NICs, and around 85% of UK income tax is collected through PAYE. As the number of gig workers increases, so does the amount of tax levied through the PAYE system. This decline is worrying for governments as self-assessment ultimately makes it difficult to collect taxes. This is because the tax authorities rely heavily on the taxpayer to declare their income and do it correctly.
In circumstances where some taxpayers may not intentionally report income while others simply do not understand their obligations, increased gig economy activity can widen the tax gap at a time when governments are in dire need of funding.
VAT
The Supreme Court case also raised questions about Uber’s position in value creation and whether Uber is acting as a principal or agent for VAT purposes.
If Uber (and not the workers) is found to be providing transportation services, Uber is essentially liable for VAT on the value of the trips. Based on this, HMRC is reported to have raised protection ratings from £ 1.5 billion ($ 2 billion).
It would be much easier for the tax authorities to collect taxes from the platform providers. Gig employees providing a taxable service must register for VAT if their income exceeds (or is expected to exceed) the VAT registration threshold. The current registration threshold in the UK is £ 85,000. This can lead to some gig workers ensuring that their reported income never crosses the threshold. When the gig worker is responsible for clearing sales tax at HMRC, much like it is for income taxes, tax authorities rely on individuals to understand and comply with their tax obligations.
The outcome of the VAT position remains to be seen, but platform providers should carefully monitor the situation.
Go forward
One thing is clear: the way we work is changing.
Certain jurisdictions have recognized the compliance issues that arise with gig work and have developed software to allow gig employees to report their income through the platform on which they provide their services. Where such systems have been introduced, tax authorities have seen an exponential increase in the amount of declared income and taxes paid by those employed in the gig economy.
Our current system is struggling to collect taxes from individuals with multiple independent streams of income, and in circumstances where individuals do not fully understand their compliance obligations, the tax loss attributable to this hidden economy is unknown. HMRC needs to work more closely with individuals and platforms to get the information it needs to solve the problem.
With the demands of many workers to have their own status for tax purposes and mounting pressure to address the perceived imbalances in the tax system between the employed and the self-employed, it is becoming increasingly clear that the current tax system is no longer suitable for all aspects of the modern world of work.
As the world fully accepts this new way of working, which is expected to expand after the pandemic, governments must continue to work with both workers and platform providers to understand and reduce the tax gap within the gig economy.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Morag Ofili is a Senior Associate at Harbottle & Lewis.
The author can be contacted at the following address: [email protected]
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