Tax challenges of the ‘Gig’ economy

OTS stimulate debate on changing work patterns

The ‘Gig’ and ‘Sharing’ economy are buzz words that have been much in the news this year and which the government are keeping a close eye on. Most recently the decision in the Uber case, which focused on the rights of those working for the organisation, has raised the profile of this subject.

A future project of the Office of Tax Simplification (OTS) will be to look at the tax issues borne out of these working arrangements, but in the meantime they have published a Focus Paper The ‘Gig’ economy (PDF) in an attempt to spark discussion.

What is the gig economy?

Put simply, ‘Gig’ is where organisations and independent workers contract for short-term engagements. The gig economy is an environment in which temporary positions are common and organisations contract with independent workers for short-term or on-demand engagements. Cambridge dictionary defines it as, ‘A way of working that is based on people having temporary jobs or doing separate pieces of work, each paid separately, rather than working for an employer.’  Instead of an individual having a permanent or part-time job, they might alternatively or additionally carry out stints of work or ‘gigs’ by connecting to public or other businesses through technology platforms.

Where work can be done from anywhere, then freelancers are in a global marketplace where time and geographical location have no boundaries and they can select from temporary jobs and projects from around the world.

Research carried out by the University of Oxford has found that there has been a rapid increase in online gig working recently.

The sharing economy refers to a means of generating money by sharing or renting out assets that they do not fully utilise.

Platform economy

This is the use of IT systems to facilitate/connect opportunities for gig and/or sharing.

Businesses such as Amazon, Etsy, Facebook, Google, Salesforce and Uber have created online systems that facilitate a wide range of activities for people. These digital platforms are set up and operate in different ways.

Digitalisation has opened up options and possibilities that were not readily available to as many people before. One consequence of this is that employers are having work undertaken by freelancers which would otherwise have been carried out by their employees. Human cloud platforms such as Upwork and PeopleperHour are used by businesses to outsource work to individuals or teams of freelancers. This may be a project of an entire department but, these are jobs that could have previously been carried out by members of staff.

Rise of the flexible workforce

Traditionally workers have been regarded as falling into one of two categories for tax, ie employed or self-employed. There has been a significant rise in self-employment and one of the reasons behind that has been the emergence of a ‘flexible’ or ‘on-demand’ workforce of freelancers and contractors, sometimes referred to as a ‘third way’ of working. This is because it suits many businesses to have a large body of temporary or flexible workers, sometimes called contingent labour.

Employment status and rights

We have this anomaly where there are only two status categories for tax purposes but three for employment rights, those being:

• Employed – entitled to full employment rights after 24 months
• ‘Worker’ – broadly an individual with a contract and although not an employee, has some rights
• Self-employed – no entitlement

Those working in the gig economy have traditionally been regarded as self-employed but this view has been challenged recently by individuals claiming they should be reclassified as ‘workers’. The reason for this is to receive the national minimum wage and holiday and sickness pay.

Reclassification for employment rights, however, does not give rise to automatic reclassification of status for tax purposes. So we can have a situation where an individual is a worker for employment rights purposes but paying tax on a self-employed basis.

Tax issues

The gig economy brings to the fore a number of current tax issues.

Individuals

Monies earned via gig or sharing activities are taxable sources of income but their tax treatment differs. Income generated from the provision of labour will be taxed under the rules for business tax whereas renting out an owned asset falls within property income rules. For example, people who let part of their home are able to claim the Rent-a-Room allowance which exempts gross rents of £7,500 or less from income tax.

In Budget 2016, ‘sharing allowances’ of £1,000 were announced for property and trading income, to be introduced in April 2017. Individuals with such income sources below the level of the allowance will no longer need to declare or pay tax on that income.

Calculating how much tax a person needs to pay can therefore be complicated and recent research found that one of the biggest challenges for those who profit from the sharing economy was managing their taxes. Many will not traditionally have had to fill in a tax return before and as a consequence find the tax system complex.

Platform operators

Platform operators will not expect any tax consequences but should they become more involved and assist their users? Should there be more accounting packages or cloud-based systems for their users to help them keep track of income and expenditure, designed with gig economies in mind? Any such involvement with their users, however, is likely to concern the platform operators that it might act as a pointer towards employee status.

Should a platform have an obligation to report who is using its services to HMRC and thereby facilitate the fair payment of tax, in a way that agencies have to do under the employment intermediaries legislation?

The hirer

Like the platform operators, would it be appropriate for them to file a report with HMRC? The risk is that this would be burdensome, especially if the hirer is not otherwise involved with the tax system.

HMRC

HMRC is faced with a potentially significant compliance issue in how to collect the tax on income earned by the gig worker. The existing tax system was not designed with the rapid increase of gig income in mind. Effective communication will therefore be vital in informing, educating and helping workers with their tax obligations.

The biggest risk posed to HMRC however is the risk of non-compliance as it is reasonable to believe that the gig economy contributes to an increase in the hidden economy.

There is also a practical issue for HMRC that will require the department to review its information gathering powers and practices. Rather than dealing with one employer who employed say 100 people, the gig economy may mean that they now employ 5 people, with 95 operating as ‘giggers’. Rather than having a single point of contact for the 100 individuals and their PAYE/NIC, they now have to deal with 95 individuals as well as the organisation.

A starting point could be requiring platform operators to check that all its worker users have a relationship with HMRC. Other suggestions include the platform offering a tax return service, at a reasonable price, for those people using it; requiring the platform to report the activities of workers or even apply some sort of withholding tax.

The Exchequer

The growth of the gig economy has potentially significant implications for the Exchequer as the rise of self-employed workers will mean no employers NIC.

In the US, the Internal Revenue Service (IRS) has just launched the new Sharing Economy Resource Centre. This web page has been designed to help taxpayers involved in the sharing economy quickly locate the resources they need to help them meet their tax obligations.

The OTS suggest that when considering how those working in the gig economy interact with the tax system as simply as possible the following factors should be taken into account:

• individuals with multiple income streams from different ‘gigs’
• facilitating and encouraging people to pay tax on gig income
• designing a system to help the taxpayer pay the correct tax
• involvement of the engager
• whether employment taxes are due

Yet another headache for HMRC to overcome but with their future hopes pinned on digitalisation coupled with the nature of these economies, it would seem logical that a digital solution is the way to go here.