Uber Case: a Tax Perspective on the Drivers' Victory in the Employment Tribunal

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Leigh Sayliss, Howard Kennedy LLP, U.K.

Leigh Sayliss is a partner and head of business and property taxes at Howard Kennedy LLP, U.K.

On October 28, 2016, Mr Y. Aslam and Mr J. Farrar won, in the Employment Tribunal, the right to be treated as workers. This article looks at some of the possible tax ramifications of the Uber case.

It is not unusual for disputes between individuals (who are claiming that they are workers) and the users of their services (who claim that the individuals are self-employed) to reach the Employment Tribunal. However, the ripples from this victory are likely to be felt far and wide because they were the named drivers whose cases were brought as test cases against Uber in Aslam, Farrar & Others v Uber BV, Uber London Ltd & Uber Britannia Ltd.

I. Introduction

In highly simplified terms, Uber operates on a system whereby:

  • i.  a passenger contacts Uber requesting a driver;
  • ii.  the Uber software (the “App”) looks for drivers who are logged on to the App as available and selects the driver nearest to the passenger;
  • iii. if the driver accepts the offer within 10 seconds, the driver is put into contact with the passenger to arrange the pick-up;
  • iv.  the driver collects the passenger, the App gives the suggested route and calculates the fare;
  • v.  the passenger pays Uber, who deduct their fee before paying the driver.

Uber claimed that the drivers were self-employed contractors; the drivers in the case claimed that they were “workers”—with the associated rights to benefits and protections (such as the National Minimum Wage, holiday and sick pay). The Employment Tribunal agreed with the drivers.

There has been significant coverage of this case, focusing on workers' rights (to which the Uber drivers will now be entitled). For the purposes of this article, it will be assumed that the Uber drivers are “workers”, for employment rights purposes, and no more will be said on the matter (albeit we know that Uber intends to appeal).

Less attention has been paid to the tax implications of the case. HM Revenue and Customs (“HMRC”) repeatedly challenge arrangements that try to turn “employees” into “self-employed workers”. It would be no surprise if, with a decision that the drivers are “workers” for employment purposes, HMRC use this as a launchpad for claiming that they are “employees” for tax purposes. The purpose of this article is to consider the hurdles that HMRC still have to jump, some of the consequences if they succeed, and lessons to be learned by other businesses possibly affected by the decision.

II. Written Terms v Practical Reality

Uber took legal advice when setting up its arrangements and drawing up contracts to ensure that the drivers would be treated as self-employed contractors. As is all too often the case, the Tribunal decided that reality did not match what had been set down on paper and founded its decision very much on the practical reality rather than the written agreements.

III. Self-employment, Workers, Employees, Employment Income and Earnings

The decision means that the drivers are workers for employment rights purposes but this does not automatically mean that they are employees for tax purposes.

There are two further hurdles HMRC will need to jump.

A. Not all Workers are Employees

The threshold for being an employee is higher than that for being a worker. All the drivers needed to prove was that they were workers, but the decision does not mean that they are employees, for employment purposes—the Tribunal did not give an express view on that point. 1

One key difference between an employee and a worker is that, for a worker to become an employee, there needs to be a mutual obligation for the employee to accept work offered and for the employer to offer work to the employee.

The Tribunal did give some help in respect of the obligations of the drivers. If any driver logged onto the App does not accept (or cancels) trips on a regular basis, Uber will log them off the App (either temporarily or permanently). The Tribunal considered that, although there may be no contractual obligation on drivers to accept work offered to them, the enforcement process imposed by Uber gives a de facto obligation to do so.

Of course, just because the drivers are obliged to accept work offered, this does not mean that Uber is required to offer work to a driver and the Tribunal did not need to consider this point. However, in reality, the App locates the driver estimated as closest to the passenger requesting transport and, if the driver responds accepting the trip, the driver will be given the job. Given that Uber's allocation of jobs will effectively be controlled by the App, it is at least arguable that Uber has a de facto obligation to offer work to any driver who is in the right place at the right time.

Taking this approach, it is arguable that there is sufficient mutuality of obligations to offer and accept work to take the status of “worker” to that of “employee”, at least in employment terms.

B. Employment Law is not Tax Law

The Uber case was heard in an Employment Tribunal, determining a matter of employment law. Whilst the employment and tax tests for employment are very similar, HMRC will make an independent decision on the drivers' status as “HMRC are not bound on the status of an individual simply on the basis that they have, for example…received a decision from an employment tribunal”. 2 Therefore, even if the Tribunal had decided that the drivers were employees, the decision would not have been determinative for tax purposes.

However, being realistic, it is extremely unlikely that HMRC would not follow a decision that is so helpful to their cause.

The final twist is that earnings for National Insurance Contribution (“NIC”) purposes are not identical to earnings treated as employment income for income tax purposes. However, the definition for NIC is wider than that for income tax so the distinction is not likely to be relevant here.

IV. The Possible Tax Consequences of the Uber Decision

If the drivers are employees for tax purposes, this would bring Uber into the scope of pay-as-you-earn (“PAYE”) income tax deductions and employers' NICs. The implications for Uber would be twofold: their costs going forward will increase, and they are at risk of being liable for interest and penalties for previous non-compliance.

Apart from any penalties for historic non-compliance, the most significant cost to Uber is likely to be the cost of employers' NICs. There is not enough information in general circulation to determine how much this cost may be. Extreme estimates have been given based on 40,000 drivers all earning 600 pounds per week (potential earnings put forward by Uber when looking to recruit drivers), which would give employers' NICs in excess of 100 million pounds each year. However, in practice, Uber indicates that 20 percent of its drivers are logged on for fewer than 10 hours per week and only 25 percent for more than 40 hours. Assuming that it is only drivers working the longest hours who would earn close to 600 pounds per week, the actual cost is unlikely to reach 100 million pounds—but it is still likely to run into many millions.

For the drivers, those paying NICs will have to pay at the higher employees' rate. In addition, if self-employed, they will have been claiming deductions for all their costs in operating their cars. Whilst, as employees, they can claim mileage allowances for use of their own vehicles, it is likely that these allowances will be less generous. It would be ironic if their success in claiming the National Minimum Wage and holiday and sick pay was largely undermined by the additional tax they will bear.

V. What Should Businesses do Now?

Businesses operating a similar business model to Uber, drawing on large numbers of ostensibly self-employed people to provide services under their name, will need to consider the implications of the case on their businesses. Before HMRC (as policeman of the National Minimum Wage, collector of taxes and supervisor of PAYE) have finished their review of Uber's activities, they are likely to be casting their eyes around for others to review. Below are a few suggestions on what businesses should be doing now.

Firstly, businesses should review the decision in detail—all is not lost. As the Tribunal says, “none of our reasoning should be taken as doubting that [Uber] could have devised a business model not involving them employing drivers. We find only that the model which they chose fails to achieve that aim.” (italics are as used by the Tribunal). The Tribunal gives detailed reasons for its conclusions and these are extremely fact specific. The starting point is to compare the facts and reasoning against the business's own arrangements.

Next, the decision makes it very clear that getting the written arrangements right is not enough if, in practice, other arrangements are followed. As the Tribunal said, “[Uber's] general case and the written terms on which they rely do not correspond with the practical reality”. An audit of whether the business does what it says it will do is essential.

If the business considers that its current model is at risk against the analysis in the Uber decision, the next stage is to think whether the model can be changed. The difficulty here is the conflict between, on the one hand, the business wanting sufficient control to enable it to offer the service it wants to offer and, on the other hand, giving the individuals actually carrying out the work sufficient freedom to be treated as self-employed contractors.

Finally, some of the tax issues have arisen because the drivers have a direct agreement with Uber and so, if the “employment test” is met, they are treated as employees of Uber—with Uber suffering the PAYE and employers' NIC consequences. In theory, a solution would be for all the drivers to supply their services through a personal service company. However, without solving the underlying problem of control and deemed employment, using personal service companies would simply pass the added cost to the drivers, who would need to increase their prices to Uber to compensate. In addition, if Uber gives the drivers assistance in setting up and managing the companies (which is likely to be needed in many cases), they will fall foul of the Managed Service Company rules, which risk putting the cost back onto Uber if the drivers do not pay the amounts due.

VI. Where Next?

The Uber case highlights the difficulty the legal, including tax, system has in keeping up with modern practices. Individuals dipping into (and out of) work on a day-by-day, or even hour-by-hour basis, does not fit well into established models of employment and self-employment.

A new HMRC team has recently been announced to look into the issues of “false self-employment”. Possibly this is the wrong question and it is time to take a wider look at general working practices and reconsider the underlying approach to tax and social security. For as long as there is a significant difference between the treatment of the employed and the self-employed, businesses are likely to “play the system”, trying to fit into the lowest cost, and most lightly regulated, structure.

Leigh Sayliss is a partner and head of business and property taxes at Howard Kennedy LLP, U.K.He may be contacted at: leigh.sayliss@howardkennedy.com


1 There are, however, some indications that the Tribunal may, if asked, have determined that the drivers were employees, such as their reference to “Employment Status” at the start of their analysis, and the statement that Uber could have devised “a model not involving them employing drivers. We find only that the model they chose fails to achieve that aim.” Whether this is simply loose language or an indication of the Tribunal's view is not clear.

2 Office of Tax Simplification—Employment Status Report (March 2015), at paragraph 7.23.

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