Self-employment numbers in the UK are rising – from 3.3 million in 2001 to 4.8 million in 2017, with many of these new self-employed working via online platforms.
Traditionally businesses dealt with fluctuating staff requirements by using temporary or agency workers, but some businesses in the gig economy are instead structured around the mass independent contractor (i.e. self-employed) model.
Unlike the traditional self-employed model, these individuals typically provide their services as part of a business run by someone else.
Recent cases before the courts looking at the employment status of personnel working in businesses such as Uber and Pimlico Plumbers have concerned the status of these individuals for employment law purposes.
Employment law has a third category of “worker” that falls between an employee and the self-employed and, in several of the recent cases, courts have overturned independent contractor arrangements to find that the individuals providing the services are in fact workers.
A worker does not have all the employment rights of an employee, but does have some more limited rights, such as rights to rest periods and paid holiday.
It is important that businesses know the employment status of individuals working for them – or risk facing expensive claims for, example, unpaid holiday stretching back over many years.
Factors that would point to an individual being a “worker”, rather than self-employed, might include a high degree of employer control, limited rights of the individual to provide a substitute to provide the services and the degree of integration of the individual into the business.
Although there are now special tax rules that treat certain individuals who contract through personal service companies as employees, for tax purposes there is no third category of “worker”, and the question remains whether an individual is an employee or self-employed. This distinction is, however, an important one.
First, the self-employed are subject to lighter NIC obligations than employees.
Secondly, employees account for their tax by the employer making deductions via the PAYE regime. By contrast, the self-employed account for their tax directly to HMRC.
In its paper ‘Platforms, the Platform economy and Tax Simplification’, the Office for Tax Simplification refers to HMRC’s research showing that a quarter of online platform workers do not feel comfortable or capable of managing their own tax affairs.
The OTS therefore recommends that the government should consider developing a new PAYE-lite system to help manage the tax affairs of online platform workers.
This is not just an UK issue. It has been reported that in Mexico Uber has agreed to participate in an automatic tax payment system whereby it will withhold tax from income paid to its drivers and account to the Mexican tax authorities on behalf of the drivers.
Mexico has a significant informal economy (which carries a higher tax evasion risk), and it may be helpful to Uber, from a public relations perspective, to be seen to be cooperating with the Mexican government.
The trend in the UK is, however, moving in the other direction. For example, banks used to be required to deduct tax from interest paid to individuals, but this is no longer the case – and individuals who receive interest income in excess of their personal savings allowance instead pay their income tax directly to HMRC.
HMRC believes that its ‘Making Tax Digital’ programme – where each taxpayer has a digital tax account to manage their tax affairs – will transform the relationship between HMRC and individual taxpayers and that the digitalisation programme will use third party information to reduce the reporting burden on individuals as well as help eliminate tax return errors (and presumably tax evasion).
PAYE is a system best suited for conventional employment models – long term permanent employees working for a single employer. It quickly becomes complicated, and often operates unfairly, where an individual changes jobs frequently or works for a number of employers.
But we know that many individuals finding work through online platforms are working through multiple platforms or are combining this work with more conventional employment. Indeed, this flexibility is one of the attractions of the online platform model.
Against this background, surely the most appropriate tax payment regime for the future would be an efficient method for online platforms to provide information to HMRC and/or its workers, so that this information can be easily incorporated into the worker’s digital tax account.
Rather than obligations to deduct tax, the focus should be on ensuring that details of self-employed earnings information are efficiently provided by or on behalf of the taxpayer to their digital tax account.
And if this works for the self-employed, should it also become the model for employees? As we move to make tax digital, is it also time for employers to cease to be required to act as unpaid income tax collectors?