CIOT/IFS Debate on How should platforms and gig economy workers be taxed?

In the gig economy, instead of a regular wage, workers get paid for the ‘gigs’ they do, such as a food delivery or a car journey. Jobs include couriers, ride-hailing drivers and video producers. Workers in the gig economy are classed as independent contractors. That means there are concerns that they may have no protection against unfair dismissal, no right to redundancy payments, and no right to receive the national minimum wage, paid holiday or sickness pay. (Gig economy workers differ somewhat from those on zero-hours contracts who are seen as employees in some sense.)

CIOT President Peter Rayney chaired the debate, remarking that while the gig economy is not new, the internet has ‘rocket boosted’ its growth. Rayney said the gig economy is seen by many as flexible, responsive and meritocratic, but has faced criticism for appearing to exploit workers and gaining apparent unfair tax advantages over more traditional rivals.

Stuart Adam, Senior Research Economist at IFS, was the first speaker. Adam said that tax should aim to be neutral across different legal and commercial arrangements. His argument is that there is no reason any more to favour some structures over others because the difference in social security entitlements between employed and self-employed is not that great anymore, and attempts to draw lines between these two types of employment lead to distortions, unfairness, and complexity.

Adam suggested aligning overall tax rates between employment income and business income. He thought this was achievable alongside reforming the tax base to minimise distortions and minimise incentives to fragment into mini-businesses. He said there are ‘some relatively easy wins here’.

On making those using contractors pay an equivalent of employer national insurance contributions (NICs), Adam said the idea of ‘engager NICs’ is problematic in practice, such as defining what is a ‘contractor’ vs another supplier. It may even require households using contractors to pay it; how to allow deduction of contractors’ costs is an added issue. But levying the tax on income from business is a more attractive idea and would allow contractors to charge correspondingly more, he argued.

Adam also noted that there are a number of incentives for business to fragment themselves (i.e. splitting income / profits across several companies or treating each worker as a separate business). These include the VAT threshold and the national insurance employment allowance. From 2023 the corporation tax small profits rate threshold will be an additional incentive.

Neil Ross, Head of Policy at techUK, made some observations about the gig economy, saying it is an evolution of an existing way of working and there is a huge variety of work within it. He added that delivery services are the biggest sector of the gig economy. Ross cited research which he says found gig economy workers are generally under 30 years-old, of average educational achievement, likely to have a full-time job and work once or twice a week in the gig economy.

Many people see gig economy as a way to ‘top up’ earnings and others as a ‘bridge’ while in education, Ross added. The flexibility and freedom are attractive to people, he claimed. But he said low pay is an issue, with 25 per cent of people in the gig economy paid less than the NMW. Ross closed his speech by saying tax is not just an issue for gig economy workers but also the platforms they use as well. He opined that the gig economy is not sufficient to explain a rise in insecure work – that comes down to government policy, he suggested.

The Tax Director of the Office of Tax Simplification (OTS), Bill Dodwell (a former CIOT President), explained that the UK has no statutory test of employment for tax purposes, instead relying on long-standing case law. This is something he finds unhelpful for individual taxpayers and engagers, believing that it is essential that everyone knows whether an individual is self-employed or employed. A statutory test should not simply attempt to replicate the old case law; instead we should take the opportunity to ask afresh who should be treated as self-employed. Dodwell was also keen that policymakers appreciate that many engagers and individuals seek flexibility in their work. And he went on to say the gap in tax treatment between employees and self-employed is well known and that encourages lower cost approaches in some areas. There are two possible approaches: a contractor levy payable by engagers in respect of their freelancers, or a general rise in self-employed national insurance.  The advantage of the contractor levy is that it would be payable by the engager, rather like employer NIC, and that it would apply in the most contentious area: freelancers.  The disadvantage would be in defining exactly when it might apply and creating another boundary.

Dodwell said that we should not approach platforms differently from other intermediaries that operate in the same market. Platforms are different from each other - some take money, some just place people; they can be a force for good. He thought it reasonable that platforms share more information on their workers with HMRC and tax authorities internationally – and they could also pass tax information to their workers to help them with their tax compliance.

The final speaker was Meredith McCammond, a technical officer at the CIOT’s Low Incomes Tax Reform Group (LITRG) who went through some examples of queries from workers that were sent to LITRG and tax advice charities. McCammond said she has found that self-employed gig economy workers do not generally have much autonomy at all.  She said such workers want to be tax compliant but find the tax system complicated – and are mostly unaware of their entitlements to reliefs and allowances. The lack of official government guidance on taxation of gig economy does not help, she added.

McCammond suggested platforms could operate a withholding tax, as a way of avoiding people in the gig economy having to rely on self assessment. She insisted that platforms can do far more to help people with their tax affairs, such as producing a ‘tax checklist’ for people who work for them.

Photo caption: (left to right) Rayney, Ross, McCammond, Dodwell and Adam

The speakers were asked in a Q&A session about making tax digital (MTD), with McCammond wary of how gig economy workers will cope with multiple filing of tax forms and disappointed that such workers were not involved in the pilots of MTD. Ross said it was important to ensure gig economy workers understand the trade-offs involved in the work. He agreed with McCammond that just because people can use an app that doesn't mean they are highly tech proficient for, e.g., online filing. Dodwell encouraged HMRC to hurry and launch the Single Customer Account.

Adam said a withholding tax was, in principle, great but he foresaw some practical difficulties. He was not convinced an additional contractor levy could work successfully.

The panel were asked if there should be a single definition of employment and self-employment, applying across both tax and employment rights? Dodwell suspected the answer was no, a single test would not work, but he emphasised that people need to be able to understand what rights they have. Adam said there may be a case for lining up definitions as much as possible for simplicity. Ross agreed with Dodwell that current levels of litigation around this area are undesirable - things should be clearer.

Finally, on VAT Dodwell said we should be thinking in broader terms: 'should this type of service be subject to VAT?' E.g. taxis should be considered as a whole sector rather than some providers being subject to VAT and some not. Australia has adopted this approach, he said, describing it as an enlightened way to deal with fragmentation issues.

A recording of the debate is available - here.

By Hamant Verma