Confusion of tax treatment and case law for ride sharing and delivery platforms
The tax system has always provided subsidies and preferential VAT benefits to the self-employed to reflect the risks of entrepreneurship and to offer a subsidy to a dynamic corner of the economy which helps generate the job-creating businesses of the future. This differentiation has always meant complexity, leading to tax leakage and opportunities for evasion. This was tolerated because of the relatively low numbers. But the explosive growth of the gig economy has magnified the tax losses hugely.
This blog is part of series from an article first published in British Tax review. VAT Calc’s Advisor andAuditor services can help on determining and reporting the correct VAT or GST on gig and sharing economy transactions around the world.
It has also given individuals a competitive advantage since the difficulties in tracking and detection mean they can operate more cheaply than compliant traditional businesses. This affects service businesses, recruitment companies and property letting agencies. Either the individual or the marketplaces can benefit from this, for VAT, income tax and National Insurance contributions (NICs). Self-employed staff are exempt from the 13.8 per cent NICs, and there is no employer contribution. This means platforms can save 17 per cent on National Insurance.
Tax challenges for individuals
The gig economy is generating many new VAT liable individuals. They may not be aware of their responsibilities and obligations for a number of reasons:
- Some of the transactions are entirely new, or an expansion of previously untaxed activities such as occasional rental of rooms.
- Income may be diverse in terms of only being occasional or spread over different platforms. This makes assessing the liabilities a challenge.
- Tax obligations are not clear, and few individuals have any experience or awareness of the VAT rules and threshold obligations. HMRC report that most voluntary registrations are down to individuals being unclear about if the threshold will apply.
Food delivery double helping
It is worth looking at the VAT position on food delivery services since it involves mixed rate suppliers for the delivery and food services respectively. In the case of major food delivery platforms, which offer consumers food from multiple local restaurants via home delivery, the transaction comes in two parts:
- Food service, charged to the consumer by the restaurant. Hot, take-away food15 is standard rated.
- Delivery fee, charged by the marketplace at the standard VAT rate. The marketplace will contract with individual freelance drivers for the delivery. It is down to these drivers to manage their own VAT if they are over the threshold.
Typically, the marketplace acts as the collector, billing the customer online for both the food and delivery services in the same payment. This means the marketplace charges the net amount for the food service, and leaves the VAT calculation to the restaurant (which must determine the differing rates for hot or cold food, drinks, etc.). This does mean business customers will struggle to recover the VAT as they do not receive a full VAT receipt for the food service.
India, for example, has just imposed 5% GST on food delivery platforms which is now sees as no longer an agent of the restaurant, but the service provider.
In the UK, the courts have repeadily rules that Uber drivers are ‘workers’, inferring the VAT obligations lie with Uber. Uber have probably now accepted that as the relationship. However, in 2021, an appeal held Deliveroo delivery agents weren’t workers. Personal performance of services is required for a person to satisfy the definition of ‘worker’ under British labour legislation. Deliveroo riders were found not to be workers because the contract between Deliveroo and riders does not require riders to make deliveries personally. Riders are free to allow a substitute rider to make a delivery using the first rider’s profile.