HMRC Spotlight Still on Otto Group Company Over Worker Status

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By Ben Stupples

A U.K. courier company ultimately owned by Otto Group, the world’s largest mail order company, is still facing scrutiny from HMRC in a case that may have a wide tax impact on the U.K.’s gig economy.

At a Feb. 22 session as part of the U.K. work and pensions select committee’s inquiry into the rise of short-term work in Britain, Carole Woodhead, the chief executive officer of parcel courier company Hermes U.K., said the West Yorkshire-based business met Her Majesty’s Revenue and Customs three months ago after the tax authority requested details on the employment status of the company’s couriers.

Since then, HMRC hasn’t contacted Hermes, one of the U.K.’s largest courier companies. “As far as we know, HMRC are still considering matters,” a Hermes spokeswoman told Bloomberg BNA in a Feb. 22 e-mailed statement, adding that the December 2016 meeting also addressed minimum wage payments.

Couriers who work for Hermes are self-employed under the company’s current employment model. As a result, instead of the company, the individual is responsible for paying employment taxes to HMRC.

Yet the company will be responsible if HMRC considers Hermes’s couriers as their full-time employees, which would be a major disruption to Hermes’s employment model and force the company to pay more tax. In turn, it could also effect any company in the U.K. with a similar employee model to Hermes, such as transportation company Uber Technologies Inc.

State Benefits

Self-employed individuals pay less toward the U.K.’s state benefits, known as National Insurance, than those in full employment with companies. That amounts to a subsidy of 1,240 pounds ($1,550) per self-employed person each year, or 5.1 billion pounds in total, according to the Institute for Fiscal Studies. Some state benefits, such as a basic pension, depend on an individual’s National Insurance payments.

The taxation of people in the U.K. who work for themselves—such as self-employed individuals, or those who both own and manage a small businesses—is a priority for Her Majesty’s Treasury amid fears that the government’s existing employment tax system could result in fewer future tax receipts for HMRC.

In releasing the 2016 Autumn Statement in November, U.K. Chancellor Philip Hammond said the government will “consider how we can ensure that the taxation of different ways of working is fair between different individuals, and sustains the tax-base as the economy undergoes rapid change.”

The chancellor is due to deliver his first budget statement to the House of Commons next month.

Hermes Inquiry

Woodhead’s appearance before the select committee—which oversees the spending of the government’s work and pensions department—comes four months after the committee’s chairman, U.K. member of Parliament for Labour Frank Field, submitted a dossier to HMRC with complaints of more than 100 Hermes couriers over their employment status. About 20 couriers said they should be full-time employees.

Citing unspecified “threats” that couriers received from Hermes when they were either unwell or unable to work, Field told Bloomberg BNA in a Feb. 22 e-mailed statement that the couriers operate in a “twilight zone” between the traditional forms of self-employment and full-time employment.

“My understanding is that HMRC are still looking at this case,” he added about HMRC’s scrutiny of Hermes. “Its findings, and any subsequent enforcement action, could be hugely important for the future of the ‘gig economy’ and the small army of people who rely on it for their income.”

Gig Economy

In the gig economy, a term derived from the music industry, individuals commonly operate as independent small business and perform work that can be broken down into separate tasks.

Today, some multinational technology companies—such as Uber—use these self-employed individuals on their digital platforms to connect the workers with potential customers.

Employees make up 85 percent of the U.K.’s workforce, but there has been “substantial growth” in self-employed individuals, which has been accompanied by “even faster” recent growth in the number of individuals both owning and managing their own business, according to the Institute for Fiscal Studies.

Supporters of the gig economy say that it allows individuals to have a more flexible form of work, while it can also provide additional income to boost earnings. Opponents of it, however, say the gig economy promotes a precarious and stressful form of work that is less flexible than it appears.

Employment Review

In response to the gig economy’s rise, U.K. Prime Minister Theresa May ordered in November 2016 a country-wide review on modern employment practices. The next month, the work and pensions select committee launched an inquiry on whether the U.K.’s welfare system supports gig workers.

HMRC examined Hermes in “very great depth” in 2011 and concluded then that the company’s couriers were self-employed for tax purposes, Hermes’ spokeswoman added to Bloomberg BNA Feb. 22. “There has been no material change to our underlying business model since then.”

Three years later, a U.K. employment tribunal between Hermes and a courier over whether the individual was self-employed, a worker, or a full-time employee, concluded that the courier was “genuinely self-employed,” Woodhead said Feb. 22 to the work and pension select committee.

“As a large company paying our taxes in the U.K. with no fancy offshore structures, I’m proud to say we pay our VAT and corporation tax in the U.K. and therefore we do have an ongoing dialogue with the HMRC,” she added after Field asked whether the tax authority was investigating Hermes.

HMRC Comment

In a Feb. 22 e-mailed statement, a spokesman for HMRC declined to comment on the Hermes case.

“When the employment relationship does not accurately reflect the underlying reality of the relationship, the wrong tax is paid,” the spokesman added. “HMRC has powers to correct the tax treatment when the employment relationship is not what is claimed.”

Otto Group

Otto Group, the global retailer and the world’s largest mail order company, according to London-based market research specialist and consultancy Apex Insight, is the ultimate parent of Hermes.

The Germany-based Otto Group, with headquarters in Hamburg, rivals Amazon.com Inc. in the e-commerce market. It had revenue of 12.1 billion euros ($12.8 billion) last year. Hermes, meanwhile, had revenue of 510 million pounds in the year to February 2016, according to the latest Companies House filings.

“Regarding Hermes, I can confirm that Hermes belongs to Otto Group,” Robert Haegelen, head of communications at Otto Group, told Bloomberg BNA in a Feb. 22 e-mail. “Hermes UK is operating a business model which has been verified and approved by HM Revenue & Customs years ago.”

Woodhead appeared before the select committee alongside Dan Warne, the managing director of U.K. food delivery service Deliveroo; Lesley Smith, Amazon’s director of public policy for U.K. and Ireland; and Andrew Byrne, Uber’s head of public policy for U.K. and Ireland.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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