Taxing the U.K. Gig Economy

 

While the All-Party Parliamentary Group report, "Tax and the UK's gig economy", released on June 29, 2018, expressly purported to set out thoughts regarding the taxation aspects of the gig economy, it's necessary to look at the gig economy in the round. We need to consider the rights those individuals have, taxation obligations and taxing the economic impact of the gig economy, and the importance of the gig economy generally.

The gig economy is notoriously difficult to tie down. A 2016 report by consultancy firm McKinsey & Co estimated that in the U.S. and the top 15 EU economies, 20 percent to 30 percent of the working age population, up to 162 million individuals, were engaged in the gig economy. Looking at the U.K. economy in isolation, 26 percent of the working population was stated to be within the gig economy, yet the Institute for Fiscal Studies, when looking at 2015–16, declared that 84.7 percent of the working population was in conventional employment.

Although the gig economy is not limited to the U.K., it clearly has greatly impacted the U.K. labor market. Operatives within the U.K. gig economy vary from platform operatives such as Uber drivers or Deliveroo couriers, to those operating in delivery services for logistics companies engaged by large online retailers, to those working for entities providing outsourced services on government contracts. Those who lost out from the Carillion collapse included numbers of contractors who could be said to have worked within the gig economy. There are also many service-providers to small businesses who can be seen as being within the gig economy. This level of diversity among gig economy workers can create confusion regarding tax issues and highlights the challenges of operating a tax system that started life in the 18th century.

Looking at Uber specifically, the tax issues can be summarized as follows. Uber's fare generation is estimated at 1 billion pounds in the U.K., yet last year it only paid U.K. corporation tax of 551,174 pounds, approximately 0.5 percent. How does this happen?

To begin with, Uber does not recognize the fares paid by users as its own income. The drivers are treated as self-employed and the fares belong to them. Uber charges the drivers for the use of its platform, and even then this is not the revenue recognized in the U.K. financial statements. As the rights to the platform are held in a Dutch company, charges to the drivers are booked as revenue there. The business is raising revenue from users in the U.K. but not paying U.K. corporation tax directly on those revenues. The U.K. operations of Uber seem to be a service-provision to the Netherlands company that appear to invoice the Netherlands parent on what is called a “cost plus” basis. The U.K. profits on which U.K. corporation tax is paid is a small add-on over and above direct costs incurred by Uber itself, in the U.K. There is potentially little or no link between the “real” U.K. profit and the profit on which U.K. tax is paid.

The result of drivers being treated as self-employed is that, upon this status analysis, there is no liability to the 13.8 percent employer's National Insurance Contribution charge. Employment law and tax law are currently misaligned. While tax law recognizes an individual as either being employed or self-employed, employment law recognizes an additional status of “worker.” Workers may correctly be viewed as employees on the one hand or self-employed on the other for tax purposes, depending on the facts. Many individuals characterized as workers will be treated, correctly or incorrectly, as self-employed by the organization for which they work.  In the case of Uber, the jury must be out as to the drivers' correct tax status.

Finally, the Uber structure results in no VAT being levied on fares. As the fares are stated to belong to the drivers and each driver invariably generates revenue of less than 83,000 pounds per annum (the point at which a person must register and account for VAT), the Uber driver isn't liable for VAT and therefore Uber's fare generation escapes U.K. indirect tax.

E-commerce

Businesses operating in the U.K. will generally have a fiscal presence here. A non-U.K. business will be liable to U.K. tax if it has what is termed a permanent establishment here. The U.K. government is still grappling with how the concept of permanent establishment fits in with modern business practices. At present the U.K. will not tax the profits of a U.K. website or server of an overseas company, as it does not recognize this as a permanent establishment. The OECD is ahead of the U.K. stating that where a server performs core functions such as taking orders and processing payments, it is classed as a permanent establishment. The concept of digital intermediary sits in an entirely separate league, even from this. It may be some time before the tax treatment of digital intermediaries will be settled.

Under country-by-country (“CbC”) reporting, large companies have to provide an annual return. The report breaks down key elements of the financial statements by jurisdiction. This legislation provides tax authorities with information to help them assess, for example, transfer pricing risks. It tends to result in wrinkles that allow what might be viewed on the one hand as structuring or on the other as avoidance. This could be a way for governments to identify the source of an international corporate's revenue streams and at least therefore tax accordingly. This does not get around the issue of 1 billion pounds of fares seemingly avoiding tax almost altogether, but maybe it could be a stepping stone to a future solution.

Planning Points        

• The gig economy is difficult to define and the diversity among gig economy workers can create confusion regarding tax issues.
• Further complications arise from the misalignment of employment law and tax law, where employment law recognizes a category of labor known as workers but for tax purposes this group of individuals cannot be classed as employed over self-employed or vice versa.
• A closer look at Uber's fare generation versus U.K. tax paid identifies that as fares belong to the drivers, Uber pays minimal corporation tax, as the drivers are self-employed, Uber avoids national insurance contributions and as the fares belong to the drivers who are generally below the VAT registration threshold, VAT is avoided as well.
• Could country-by-country reporting provide a way for governments to identify the source of an international corporate's revenue streams and tax accordingly?
                        

By Nigel May, Tax Partner, MHA MacIntyre Hudson, U.K.

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