The Office for Tax Simplification (OTS) has recently published its thoughts on the gig economy and what it means for tax. Whilst there has been much comment on how the workers in the gig economy could be taxed either as self-employed or as an employee, and the potential National Insurance consequences; the OTS has dug deeper and highlighted how tax should be collected from the gig economy and what the impact on the Exchequer could be.
The key question is whether the technology platform should have a greater role in administrating and collecting taxes in a similar way as an employer would do. Our tax system is very complicated and recent research has shown that there is a shift towards self-employment and the mixing of employment with self-employment. This shift will provide individuals with challenges on how to be compliant with their tax obligations. For many this will be the first time that they have had to engage with the tax system and indeed the individual may not be aware that their income is taxable in the first place and needs to be declared. One possibility is whether platform operators in the gig economy could assist their users with providing accounting packages to keep track of income although they may be reticent to be so involved as it may point more towards employment status.
HMRC and HM Treasury will also be considering this in much detail as they have much to gain, and indeed lose. One of the key things is the significant compliance issue of how to collect the tax due. The current system is not designed to collect tax from a burgeoning gig economy. HMRC will have concerns over the potential of non-compliance and the possibility that the gig economy actually increases the hidden economy. There is also the cost of administration to HMRC in dealing with an increasing number of individuals with various sources of income which are untaxed. The OTS considers whether platform operators in the gig economy should check if all users have a relationship with HMRC or whether there is a need to operate a form of withholding - similar to the Construction Industry Scheme. For HM Treasury the key issue is the possibility of the replacement of employers with employees under the PAYE system with a platform operator using self-employed labour. The result will be a much lower National Insurance take as well as the direct collection by the employer of tax under PAYE and NIC.
Finally there is the VAT issue where a number of small businesses under the VAT threshold do not need to charge VAT on their services. There are a number of issues here, such as commercial advantage as well as a loss of duty to the Treasury.
One thing is clear, irrespective of what comes out from Matthew Taylor’s review of modern work practices there are likely to be calls for some changes to the tax system to deal with those modern work practices.
For more information please contact Graham Farquhar or your usual RSM contact.