The value of the gig economy is expected to more than double from US$204 billion in 2018 to US$452 billion by 2025.7 In the UK, the Trades Union Congress (TUC) estimated in the summer of 2019 that 4.7 million people now work regularly on one or more of the gig economy platforms. Two-thirds of them are aged between 16 and 34 and most are male.
This blog is part of series from an article first published in British Tax review. VAT Calc’s Advisor and Auditor services can help on determining and reporting the correct VAT or GST on gig and sharing economy transactions around the world.
OECD, EU and UK in VAT studies of Gig & Sharing Economies
In addition, the OECD Gig and Sharing economy VAT study has reviewed many of the related issues discussed below. The EU’s VAT in the Digital Age proposals will look to reform VAT treatment of platform economy (gig and sharing platforms). HMRC’s UK gig & sharing economy VAT consultation started in 2021.
Both the gig and sharing economies groups have become a major concern for the tax authorities because of their growth and lack of an effective taxing model to prevent erosion of the tax base.
VAT obligations for individuals: a tax avoidance haven for the gig economy
The following section summarises the VAT position in relation to most gig and sharing economy models involving individuals as the self-employed service provider. Such service provision involves contracting via marketplaces with consumers. The writer also discusses the problems associated with the operation of VAT registration thresholds which problems can be seen as being particularly acute when compared to the traditional, offline world.
VAT liabilities for individuals: the threshold test
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.
This shift in the workforce is reaching proportions which are difficult to ignore: the number of self-employed workers has risen from 12.5 per cent of the workforce in 2009 to 18 per cent in2019accordingtotheOfficeforNationalStatistics(ONS).11 Thislossofincometaxdeductions and VAT represents a fundamental and growing threat to the tax base, which funds public services and welfare payments.
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,12 followedbyapublicconsultation13 completedattheendof2018.
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.