Uber Faces New Tax Setback From U.K.'s Labor Market Review

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By Ben Stupples

Uber Technologies Inc. faces a fresh setback in its efforts to break even after a landmark labor market review raised the prospect of increased taxes for individuals operating in the gig economy.

A July 11 report of the U.K.’s labor market proposes making self-employed individuals categorized as “workers” employed for tax purposes. As a consequence, companies using workers may face a tax on benefiting from the individual’s services, known as employer’s National Insurance Contributions (NICs).

Uber is facing a legal battle over whether its drivers are workers or self-employed under the U.K.’s employment laws. In October 2016, a tribunal ruled that Uber’s U.K. drivers are workers, guaranteeing them more employment benefits. The company has since appealed the decision.

The prospect of a tax increase in the U.K. may add to the scrutiny over whether Uber can turn its growing business into a profitable company. Despite its popularity, Uber has posted significant losses as it seeks to expand across the globe. In the first nine months of 2016, the company lost more than $2.2 billion, Bloomberg News reported in December 2016, citing a person familiar with the matter.

Uber welcomes the U.K.’s review, which looks at ways of work that predate smartphone-based apps like Uber, Andrew Byrne, the company’s U.K. head of tax policy, said in a July 11 statement. Uber “would welcome greater clarity in the law over different types of employment status,” he added.

‘Dependent Contractors’

Self-employed individuals pay fewer employment taxes—or NICs—than those in full employment. In addition to organizing the NICs of their employees, companies have to pay the tax separately each month as well under employer’s NICs, providing an incentive for them to use a workforce made up of self-employed individuals instead of employees.

The July 11 review, commissioned by Prime Minister Theresa May and led by former Labour Party strategist Matthew Taylor, suggests switching this system to make them employed for tax purposes and to rename them as “dependent contractors.” This innovative approach will help bring the U.K.'s employment and tax laws closer together, while also create clear boundaries between them, it said.

“If implemented, these recommendations would mean gig economy employers will be liable to pay Employers NIC,” Graham Farquhar, employment tax partner at London-based accountancy firm RSM, said in a July 11 statement. “As a result, it is hoped a full review of the tax system will be imminent so that the key issues can be properly considered.”

The review also adds to the increasing scrutiny over whether companies are deliberately exploiting the U.K.’s employment laws to avoid tax by making their workers self-employed for tax purposes.

A May 1 work and pensions select committee report cited “bogus” employment practices in the gig economy, a labor market that relies on a flexible and self-employed workforce. It also identified Uber and London-based food courier Deliveroo as two companies that exploit the U.K.’s laws.

The framework of the U.K.’s tax system provides a clear incentive for the “bogus claiming of self-employed status,” the review said. The government should “examine ways in which the tax system might address the disparity between the level of tax applied to employed and self-employed labour.”

Value Added Tax

In addition to the prospect of paying more employment taxes, Uber is battling a U.K. High Court case over whether it should charge value added tax (VAT) on the fares that its drivers charge to customers.

The case focuses on whether Uber, who saw their co-founder and CEO Travis Kalanick resign last month, is a transport provider or a technology platform. As a transport service supplier, Uber may be liable for charging VAT, which is imposed on businesses that provide goods and services.

In May 11 opinion, EU Court of Justice Advocate General Maciej Szpunar said Uber “falls within the field of transport,” rejecting Uber’s argument that the company is simply a car-hailing application.

Responding to the July 11 review, Deliveroo said: “The Government should be under no illusions that any moves to restrict flexibility could undermine the very thing that attracts people to work in this sector.”

The company added that the government “needs to ensure that any new measures are pro growth so that companies can continue to expand and create well paid opportunities for people in the U.K.”

Known as the Taylor Review, the report stated that recommending specific tax changes to the U.K. government is outside its purview. It still highlighted, however, how treating different forms of work more equally through the tax system will create a more fair and economically efficient labor market.

Rate Raise?

The review may also bolster efforts from U.K. Chancellor Philip Hammond to raise NIC rates.

At this year’s Spring Budget, Hammond sought to address the imbalance by increasing Class 2 NICs by 2 percent within the next three years. A political backlash saw him scrap the announcement, however, a week later.

Yet the Taylor Review underlined the basis of the Chancellor’s reform, saying that the gap of NICs paid between employees and self-employed individuals should be moved closer together. Under the existing system, the U.K. will lose as much as 6 billion pounds ($7.7 billion) a year, according to research from the Resolution Foundation think-tank.

In a July 11 email, a U.K. Treasury spokesman said the government will respond to the Taylor Review in full later this year.

With assistance from Eric Newcomer (Bloomberg)

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

To contact the editor responsible for this story: Penny Sukhraj in London at psukhraj@bna.com (Bloomberg BNA); Andrew Pollack at apollack1@bloomberg.net (Bloomberg News)

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