The gig economy has been part of modern life for some time. In the gig economy, instead of a regular wage, workers get paid for the “gigs” they do. Our reliance on gig economy workers has increased significantly since the start of the pandemic, with many businesses and consumers depending on gig workers to deliver goods as lockdown restrictions limit the ability to trade in the usual ways.
In addition, as a result of Covid-19, many people who were reliant on income from steady employment have turned to gig work to supplement or replace their primary source of income.
Further disruption to the labor market was caused by the U.K. Supreme Court’s recent ruling that Uber drivers were “workers” (rather than self-employed) and were entitled to the basic rights enjoyed by workers—including minimum wage and workplace pensions. To come into line with the ruling, Uber recently announced that would reclassify its drivers as workers from March 17, 2021. Given the insistence of many platform providers that they are merely intermediaries, this shift poses some interesting questions for other tech companies in this space.
Many welcome the disturbance caused by the gig economy, whilst others are concerned about the long-term impact and the tax challenges it creates for governments around the world.
Why is Worker Status Important?
Worker status is important as it has an effect on the employment rights of an individual, as well as the manner in which they are subject to tax.
There is an abundance of case law which seeks to establish tests and principles to determine whether an individual is an employee or a worker. Where none of the tests are met, an individual is likely to be self-employed—i.e. an independent contractor, running their own business, rather than a worker or employee. Those who fall into this category have very few rights.
The Supreme Court in the Uber case relied heavily upon the Autoclenz Limited v Belcher judgment which made it clear that any agreements in place must reflect reality. This means that although the signed contract might contain the hallmarks of self-employment, regard must always be had for the commercial reality of the relationship between the parties when determining employment status.
From an employment law perspective, only employees are entitled to all statutory employment rights. This means that a worker cannot claim unfair dismissal or a statutory redundancy payment. Those categorized as workers are, however, entitled to some key statutory rights, including those in relation to the national minimum wage, and paid annual leave, and these bring with them a cost.
Another right that the drivers in Uber were entitled to as a result of the worker status ruling was whistleblowing protection. Whistleblowing legislation protects workers against dismissal and victimization. Whistleblowers are particularly vulnerable in the gig economy due to the manner in which they obtain work and so this added protection may result in further scrutiny of the working practices of platform providers.
The term “worker” is widely established in statutory employment law; however, it is not currently recognized by the U.K. tax authority, HM Revenue and Customs (HMRC)—as the U.K. system of taxation chooses to categorize individuals as either employed, and so subject to Pay As You Earn (PAYE) tax, or self-employed, and so taxed via self-assessment.
Whilst the rate of income tax is the same for employees and the self-employed, those who are self-employed only pay tax on their profits, rather than the total income—enabling them to deduct any relevant expenses when calculating the total taxable amount. In addition, if trading through a company, profits can be extracted by way of dividends or pensions which may result in less tax to pay.
Those who are self-employed also pay less by way of National Insurance Contributions (NICs).
By contrast, the employer/employee relationship is simple, with tax and NICs collected by the employer at source via the PAYE system.
According to analysis carried out by the Institute for Fiscal Studies, approximately 19% of the U.K.’s tax revenue comes from NICs and about 85% of the U.K.’s income tax is collected via PAYE . So, as the number of gig workers rises, the amount of tax collected through the PAYE system decreases. This decrease is concerning for governments because ultimately self-assessment makes taxes harder to collect. This is because tax authorities become heavily reliant on the taxpayer to declare their income and to do so correctly.
In circumstances where some taxpayers may fail to declare income deliberately, whilst others simply do not understand their obligations, increased gig economy activity may increase the tax gap at a time when governments are in desperate need of funds.
The Supreme Court case also raised questions about Uber’s value-added tax (VAT) position and whether Uber acts as principal or agent for VAT purposes.
In essence, if it is determined that Uber (rather than the workers) provides transport services, Uber will be liable for VAT on the value of the rides. It is reported that HMRC has raised protective assessments of 1.5 billion pounds ($2 billion) on this basis.
For the tax authorities, it would be far simpler to collect tax from the platform providers. Gig workers who provide a taxable service must register for VAT when their income exceeds (or is expected to exceed) the VAT registration threshold. The current registration threshold in the UK is 85,000 pounds. This may lead some gig workers to ensure that their declared income never exceeds the threshold. Where the gig worker is responsible for accounting to HMRC for VAT, much like with income taxes, tax authorities are reliant on individuals to understand and comply with their tax obligations.
The outcome of the VAT position remains to be seen, but platform providers should monitor the situation carefully.
One thing is clear, the way in which we work is changing.
Certain jurisdictions have recognized the compliance issues that gig work presents and have developed software that enables gig workers to declare their income via the platform through which they provide their services. Where such systems have been adopted, the tax authorities have seen an exponential growth in the amount of income declared and tax paid by those working in the gig economy.
Our current system is struggling to collect tax from those with multiple independent income streams and, in circumstances where individuals do not fully understand their compliance obligations, the tax loss attributable to this hidden economy is unknown. HMRC will have to work more closely with individuals and platforms to obtain the information it needs to begin to tackle the problem.
With many calling for workers to have a separate status for tax purposes, and growing pressure to address the perceived imbalances in the tax system between the employed and self-employed, it is becoming more evident that the current tax system is no longer suitable for all aspects of the modern world of work.
As the world starts to fully embrace this new way of working, which looks set to continue to grow post-pandemic, governments must engage further 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 with Harbottle & Lewis.
The author may be contacted at: firstname.lastname@example.org