By Caroline Muir, Director, Tax
It has become increasingly clear in recent years that current tax rules are not easily applied to the way in which businesses now operate. The focus has now moved from international tax reform where significant changes have been made to whether new rules are needed for the gig economy. The Taylor report issued last week made various recommendations around legal aspects as well as tax considerations and the Office of Tax Simplification has published a paper on the key tax issues but let’s start with why there is a perceived issue at all.
Firstly what is gig economy and how is it taxed? The term is used to describe a working practice whereby an estimated 1.1 million individuals in the UK are being paid on a per job basis, such as couriers and taxi drivers. In some cases, the gig economy represents a modern way of working that enables flexibility. In other cases, it could be viewed as an exploitative business model which deprives individuals of basic employment rights.
One of the key issues is that there are currently two status categories for tax purposes (employed and self-employed) but three for employment rights:
- Employed – entitled to full employment rights after 24 months;
- Self-employed – minimal employment rights e.g. health and safety, and
- Worker – broadly an individual with a contract who has basic employment rights.
Gig workers are typically seen as self-employed with individuals either paying income tax and Class 4 NICs on their profits or operating through a personal service company which will pay corporate tax. Further tax being due when the profits are taken out by way of dividend.
One of the major recommendations of the Taylor report is that there is a case that individuals who have casual, dependent relationships with their engager should receive the benefit of worker status or dependent contractor as he suggests calling it. The review also calls for tax/NIC withholding and employer’s NIC to apply to all workers to make labour taxation more consistent across employment types.
This has far reaching implications:
- Individuals - May be self-employed for tax purposes but with rights to receive the National Minimum Wage, holiday pay and the benefit of pensions auto-enrolment but with potentially higher tax burden if the recommendation to reduce the differential in NIC between the employed and self-employed is followed;
- Platform operators - Need to review their operating model to consider the potential impact such as how to fund the additional costs of these rights and employer’s NI. There is an opportunity to consider how resourcing models could operate efficiently in the future, not only in relation to labour engaged directly, but that within the supply chain;
- HMRC - would also be faced with a potentially significant compliance issue. The existing tax systems were not designed with burgeoning gig income in mind.
The report highlights that tax considerations are the source of significant tension, driving engagement of individuals in a particular way. It is clear that there will be a spotlight on rights for workers going forward, with potentially greater policing of these by the relevant agencies, including HMRC and the Pensions Regulator. This report may also provide the Government/HMRC with a springboard to look in depth at employment status from a tax perspective. This could include, for example, building on the withholding regime introduced for the public sector engaging contractors through personal service companies which took effect on 6 April 2017.