The rise of the gig economy has changed the way we look at the application of technology in traditional marketplaces and has provided many people with the opportunity to supplement their primary income. However, as governments struggle to keep up with changes in employment behaviour, workers have been left uncertain as to how to account for the tax on their income.
What is the gig economy?
Broadly, the term refers to those who use online platforms to source on-demand work. Rather than be paid a regular salary, workers are paid for each individual "gig".
There have been a number of cases in recent years which have sought to challenge the employment status of gig economy workers. These workers were typically classified as self-employed and as a result, do not receive any benefits such as sick leave and holiday pay.
However, since the recent employment tribunal decision in the Uber case and the eagerly awaited Supreme Court decision in Pimlico Plumbers, a new classification of “worker” has emerged who is not catered for by our current system of taxation. At present, tax law only distinguishes between employment and self-employment and simply does not cater for the taxation of “workers” who are entitled to holiday pay and minimum wage.
Case law has therefore created an employment status not recognised by tax legislation, which leads to uncertainty and begs the question - should the tax system reform to reflect the new ways of working?
What are the tax-issues facing the gig economy?
There are a number of tax concerns which arise out of the gig economy.
(i) The gig economy worker
Large numbers of those employed in the gig economy have multiple sources of income. This could lead to confusion for some individuals resulting in tax returns filled out incorrectly or not at all. Some gig economy workers may wish to deliberately not declare income from this additional work, whilst others simply may not know what their tax obligations are. This exposes many people to a potential HMRC enquiry and penalties arising from any possible lost revenue.
(ii) The platforms
A shift towards a classification more akin to employed status will have cost consequences for the platform as they will have to pay National Insurance contributions and operate PAYE. There are also calls for a greater onus on the platforms to not only assist workers with their tax compliance obligations but to assist HMRC in their collection of tax by reporting workers.
Recent HMRC figures indicate that approximately £4.4bn of tax was left uncollected from cash in hand jobs. They now face a huge task in taxing income hidden within the gig economy. The current systems in place were not designed to collect tax from those with multiple 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.
Perhaps lessons can be learned from the approach taken in Estonia where Uber worked with the Estonian Tax authority to develop a new electronic tax system that enables self-employed Uber drivers to declare the income they earn on the platform at the press of a button.
This approach led to a six-fold increase from 2015 to 2016 in the amount of income declared from drivers connected with Uber and other similar services, with authorities hailing the simplicity of the system as the reason for its success.
With hotly anticipated measures to address the perceived imbalances in the tax system between the employed and self-employed expected later this year, there is no doubt that scrutiny on the tax and employment arrangements adopted by those within the gig economy will only increase.