UK launches VAT on gig and sharing economies consultation
- Dec 10, 2020 | Richard Asquith
The UK Treasury has today launched a public consultation on the taxation of the gig economy – ‘VAT and the Sharing Economy’ Its aim to redesign the tax system which is struggling to fairly capture revenues from a sector estimated to be worth £140bn by 2025. The two threats the UK and other governments see is a large, untaxed activity and the tax handicap it creates for traditional businesses.
The Treasury will be reviewing five sectors under the review:
- ride sharing;
- accommodation sharing;
- household services;
- professional services; and
- collaborative finance.
The principal issue is the over 5 million UK self-employed workers who now operate in the sectors generally do not generate enough income to pass the VAT registration threshold, £85,000. They therefore legally avoid indirect taxes.
Beyond VAT, the Treasury is concerned problems for other taxes - particularly income tax.
What are the gig and sharing economies?
- The gig economy consists of individuals offering their time in the form of services, generally on a freelance or part-time basis. These services include: ride-sharing; professional; design; consulting; and delivery. Millions of people around the world are now participating in the gig economy, either through choice or by force of circumstance. It enables them to offer their spare time and to work flexibly around other work or family commitments to earn additional income in a potentially global market. Increasingly, they may offer their service to multiple customers and on many platforms simultaneously. In return, customers get to source extra labour, often specialised and from around the world, at short notice without incurring hiring or agency costs.
- The sharing economy involves individuals or groups, renting out assets they own to customers who need them. These assets include: homes; parking; car clubs; crowdfunding; and peer-to-peer lending. The sharing economy allows individuals to generate income from underused assets, which may enable them to fund initial purchase finance. For the customer, they can gain selective access to a much wider range of services. Crucially, there is no transfer of ownership of the assets.
VAT challenges to gig & sharing economices
Self-employed individuals providing a taxable service must register for VAT when their income exceeds, or is expected to exceed, the VAT registration threshold in the previous 12 months.9 (Many other countries use calendar-month based thresholds.) The compulsory UK VAT registration threshold is £85,000.10 A peculiar gig-economy trap in calculating whether an individual has passed this threshold lies in such individuals having to incorporate services brought from abroad. These services include those provided by many non-resident marketplaces to individuals. For example, Uber is based in the Netherlands and its charges to its ride-sharing drivers in other countries have to be included when evaluating whether or not the threshold has been crossed.
This feature of the gig and sharing economies is at the heart of the tax challenge. Almost all individual participants are below the level of the threshold. Or, if they are not, it is difficult to determine when they cross the threshold. The gig and sharing economies have enabled millions of individuals to earn additional taxable incomes easily whilst slipping below the VAT threshold or radar of the tax authorities. Often this involves such individuals leaving or cutting down on traditional employment which is subject to PAYE/income tax and which relies on their employers levying VAT on their supplies.
VAT registration threshold clustering: magnified online
The UK operates by far the highest VAT registration threshold in the EU and OECD. This has generally been portrayed as a targeted tax subsidy for start-up businesses which are seen as a key sector for future job creation and innovation. However, it has always suited the UK Treasury to keep around 3.5 million sole proprietorships out of the tax administrative net given the low-cost benefit.
The effect is to encourage businesses lawfully (by turning down work) or unlawfully (by splitting sales into another business or receiving cash-in-hand) to supress their turnover below the threshold. There is clear evidence of a large volume of businesses “clustering” at the turnover level just below the threshold. This has been looked at by the UK Office of Tax Simplification.
The gig economy is magnifying this problem of the exemption, and the loss of tax revenues. It is creating a swelling population of individuals who are nearing the threshold, and may be manipulating working patterns to avoid registering and having to levy VAT. In short, the high threshold has created an attractive, and legal, VAT avoidance scheme for the gig economy. The UK Government is committed to not increasing the VAT threshold until at least 2022,14 but it may be forced to restructure the threshold sooner.
VAT issues for the Government: invisible individuals
HMRC’s whole premise when it comes to raising income tax is based on collecting tax and National Insurance for multiple staff from a single employer with finance skills and experience of the rules. However, they are now moving towards having to collect tax from a multitude of individuals with limited or no tax expertise. The vast majority of these individuals will be below the VAT registration threshold. The challenges for the tax authorities include:
- identifying who these individuals are;
- capturing all of the individuals’ VAT sales since they may be working on multiple platforms, and working in the offline world, too;
- determining the VAT status of the individuals, marketplaces and other parties in the multitude of business models;
- identifying and processing the correct VAT treatment, with added complexity in the growing cross-border gig market; and
- registering and auditing of large volumes of individuals with low levels of income.