Workers in the gig economy could soon have income tax deducted from their earnings if the government accepts the recommendations of their independent tax advisers. The proposal will require those employed in gig economy platforms such as Uber and Deliveroo to have tax deducted from their earnings and have this transferred to HMRC, with the online platform operating a system equivalent to that of PAYE. Its aim is to reduce the number of people submitting a self-assessment tax return, as well as making the user experience of dealing with HMRC much easier.
Digital Inclusion to Increase Tax Payments
Digitalisation has been integrated throughout HMRCs systems, a prime example is Making Tax Digital (MTD). The aim of MTD is to have all interaction between HMRC and its customers transmitted through digital systems. This proposal fits into this process as it is utilising the digital platforms that gig workers are using.
This suggested level of digital inclusion is in line with MTD. As a worker completes a task and is paid, the system will automatically calculate their earnings, tax and National Insurance. Once calculated, the relevant amounts will be distributed between HMRC and the worker. The only problem is that you cannot simply automate this process at the point of payment. Such an approach would not allow a self-employed worker to make deductions for allowable expenses.
Reducing tax loss is a prime initiative behind HMRC wanting platforms to play a part. It is estimated that out of the £7 billion in uncollected tax for those who self-assess for income tax, £5 billion is accounted for by self-employed individuals. If platforms were to collect tax at source, HMRC would meet a significant goal in tax collection.
Platform and Individual Relationship Complexity
Privacy is a big question. An individual working in the gig economy does not have to disclose information to platforms if they are also earning through other platforms. It is therefore vital for HMRC to ensure they can protect the privacy of each individual. Given the amount of integration, this is a significant task.
Platforms have been challenged by Trade Unions over the last 18 months in respect of employment rights. Some platforms do little more than act as a match making service and take a fee, whilst others are more intrusive. They use ratings to determine how good an individual is and if they get work through the platform. The legal case is that in doing so the platform acts as an employer. Because of this, legal challenges over employment status and employment benefits have arisen, including:
– The relevant minimum wage
– Holiday pay, statutory sick pay and redundancy pay
– Protection against unlawful discrimination and unfair dismissal
– Statutory maternity/paternity/adoption/shared parental leave and pay
The National Insurance (NI) amount an individual has to pay is also impacted by status. Individuals that are of a self-employed status pay a low level of NI. As well as the individual paying NI, the employer also has to contribute. This lower rate has an impact on the money taken by HMRC. In 2017/18, it represents a shortfall of £4.1 billion towards pension entitlements. By taking money via the platform, HRMC will be hoping to reduce that shortfall by ensuring that where is no fraud.
The Construction Industry Scheme
The construction industry’s CIS scheme is an example of a platform approach. Through the scheme, tax is deducted from a subcontractor and paid directly to HMRC. The Enterprise Times talked to several self-employed builders about CIS, and all respondents stated they wouldn’t use it as it is not a time saving technique.
The OTS Proposal
On pages 8 and 9 of a report produced by The Office of Tax Simplification (OTS), it states:
‘Perhaps a structure for platform workers who wish for their tax to be withheld monthly (or weekly) by the platform they could be considered along the following lines’:
- The platform computes taxable profit in real time.
- The platform withholds tax (perhaps with options as to whether this is evenly withheld or “back-end” loaded for those with more fluctuating income).
- The platform pays the tax on account to HMRC (for the worker this would provide reassurance that their estimated tax liability is being met on an ongoing basis rather than facing a tax bill to be paid in its entirety at the end of the financial year).
- The platform signs up with HMRC as an “agent” for the platform worker so that they can apply the equivalent of a tax code.
- The platform can “correct” the withholding at the end of the year so the platform worker has nothing further to do. This mechanism could initially apply only to large platforms but, over time, could be extended to smaller engagers.