Getting digital: Smart solutions for how to tax the gig economy

Robert Vaughan
Countries should rethink how the tax system operates through a digital transformation of the tax authority (Source: Getty)

After causing so much disruption to established organisations over the last few years, 2017 was the year the gig economy’s own set of growing pains came to the fore.

Legal challenges, additional regulation, and uncertainty over employment classifications have all dominated the news reels.

2018 has opened with renewed pressure on the government to raise tax revenue to help fund public services. This is likely to bring back into sharp focus the question of how the gig economy should be taxed.

Read more: A robot tax won’t fix our public funding crisis

The major concern of policymakers is that, if the gig economy leads to a large proportion of the workforce shifting from an employed to a self-employed status, this would cause additional strain on the public finances.

This stems from a common feature of tax systems to incentivise entrepreneurship, most often through different rates for self-employed individuals compared to employees (e.g. such as through National Insurance Contributions in the UK).

At the same time, taxes from employed individuals are often collected automatically through their payroll (such as through PAYE in the UK), while self-employed individuals tend to be required to self-assess and report their taxable income.

Automatic deductions not only lead to higher compliance with the tax system, but allow the Treasury to effectively outsource some of the administration costs to large employers.

The gig economy does have a positive role to play in the tax system. Digital platforms bring income that might have been received cash-in-hand in the informal economy into a more transparent setting, where it is easier to track, monitor, and tax.

In addition, if the gig economy boosts worker productivity, this extra economic activity will also be taxed and feed through into higher tax revenues.

It isn’t yet possible to understand whether the net impact of the gig economy on tax revenues is positive or negative, but what is clear is that the risks and opportunities are substantial.

Income tax generated £296bn alone for the Treasury in 2016/17, making up over half of the total tax take. And with our analysis pointing to the gig economy growing at 10 times the rate of the economy as a whole, it is critical that policymakers start searching for solutions now.

So what should they do? We’ve recently supported the European Commission to identify some of the emerging examples from tax authorities around the world. We’ve found that, while no one country has found a perfect solution, much can be learned from piecing together others’ experiences.

We’ve observed three broad steps to the policy approach.

The first step has been to make it clearer to gig economy providers what their tax obligations are within the existing framework.

Australia recently issued a clarification on the applicability of General Sales Tax to ride-hailing platforms, while France has clarified social security thresholds and rates specifically for long-distance ridesharing activity.

An online tax calculator has been floated in a number of countries, including the UK, which could even be built into platform’s digital interfaces.

The second step has been to examine whether existing tax mechanisms are fit for the purpose of taxing the gig economy, making adjustments to these where appropriate. Some countries have seen that clarifying the status quo is the simpler solution, whereas others, such as Belgium, have created a new “peer-to-peer” status within the tax code, with bespoke rates and thresholds.

The UK has sought to take gig workers who generate small bits of occasional additional income out of the tax system all together, launching two new £1,000 allowances for property and trading income in 2017, aimed at stimulating “micro entrepreneurship”.

Third – and most radically – has been to rethink how the tax system operates through a digital transformation of the tax authority.

Estonia is the standout example in this area. Already the first country in Europe to fully digitise its tax system, the tax authority partnered with local ride-hailing platforms, including Taxify and Uber, to share their transaction data in return for automatically populating online tax returns for drivers.

Such a system-wide solution could be a game-changer. It simultaneously allows tax authorities to maintain a sustainable stream of revenue, while providing gig economy workers with certainty on their tax liabilities, and streamlining administrative burdens across the board.

Don’t expect governments to be able to implement the “Estonia model” overnight – the population of the Baltic state is roughly the size of south east London. Scaling this model to replace large installed legacy systems remains a huge challenge in practice.

But Estonia’s success can also be put down to a more intangible ingredient: trust between the government, platforms, and gig workers. More trials and partnerships could be a way of exploring a new working relationship in 2018.

Read more: London to lag rest of UK economy in 2018 says the Institute of Directors

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