APPG Challenges the gig economy poses to the tax system

Transcription

1 APPG Challenges the gig economy poses to the tax system Mark Groom 20 November 2017

2 Agenda Key challenges What is the gig economy? Employment law Income tax and NI Defining the population Objectives? Compliance; Employment Rights; Revenues; all three? Status for what purpose? Complex boundaries and plethora of case law Worker = Dependent Contractor? Platform based working and the NMW/NLW How we pay tax Is our NI regime fit for purpose? Unlevel playing fields Newton s third law VAT Agent-Principal model vs. Worker Status VAT registration threshold Incorporation A veil over an individual s effective employment status Barrier to efficient tax collection Facilitates the lowest possible overall tax rates Switches off worker/employment rights 2

3 Defining the population Estimated size of the gig-economy We don t have enough detailed data to properly assess the scale of the gig economy. Current best guess is c.1.3m Gig workers (Source: CIPD 2017) part and full-time, ages 16-64, excluding those: providing rented or shared accommodation (e.g. Airbnb) conducting online sales (e.g. ebay). c.2.2m Gig jobs (source: Labour Force Survey 2017) Deloitte estimate after applying proportions of those reporting gig economy work (CIPD) to the numbers of working adults, full-time students and unemployed (Labour Force Survey) Giggers weekly hours 80% 16 hours or less 12% hours 8% 35 hours or more Total pay bill Approximately 9-10 bn (Transport, Food & Goods Delivery; Platform Workers; Others) 3

4 Employment Law Status for what purpose? Employment Law Tax and NI 4

5 Employment Law Worker = Dependent Contractor? Definition in short (s230 ERA 1996): and individual who has entered into works: (a) Under a contract of employment; or (b) Under any other contract where the individual undertakes to perform personally any work/services for another party to the contract But not if that party is a client/customer of the individual s profession or business undertaking. Policy intention: to extend the benefits of protection to workers (whatever their formal employment status) who may be required to: - work excessive hours, or - in the case of the ERA or NMWA, to suffer unlawful deductions from their earnings or to be paid to little. The purpose of the Regulations is to extend protection to self-employed workers who are, substantively and economically, in the same position as employees Who are considered to be in a subordinate and dependent position vis-à-vis their employers BUT: cannot include every person who is self employed. Exclusion: for those carrying on a business undertaking It is necessary to distinguish between: - workers whose degree of dependence is essentially the same as that of employees; and - contractors who have a sufficiently arm s-length and independent position to be treated as being able to look after themselves in the relevant respects. 5

6 Employment Law: Rights and protections State-Financed Benefits 2017/18 Employee Worker Fully selfemployed Single Tier State Pension pw pw pw Maternity allowance/smp weeks % of pay (if > )* pw pw Maternity allowance/smp weeks 7 to pw* pw pw Jobseekers allowance* income based < age 25 (income based means tested) >= pw pw pw pw pw pw *Universal Credit Protections and Employer-Financed Benefits Employee Worker Protection for whistleblowers Protection from unlawful deduction from wages Unlawful discrimination Working time including holiday pay ( ) Auto-enrolment pension contributions ( ) NMW / NLW ( ) Employee-only entitlements Employee Statutory sick pay 28 weeks Jobseekers allowance* (contribution based) payable for <= 6 months Redundancy payment Statutory notice entitlement Flexible working rights Protection on the transfer of an undertaking pw pw pw Employee SMP 92% recoverable from State 6

7 Employment Law Complex boundaries Key factors Officeholder, employee, IR35, Chapter 10 Agency worker (SDC) Selfemployed Worker Fully selfemployed Personal service (no unfettered substitution) Supervision, direction, control over how services are provided) x x Carrying on own business undertaking x x x Provision of substantial own equipment Financial risk Profit from own sound management Control over what work and when & where it is done Integration/part and parcel of the engager s business x x 7

8 Tax and NI Is our NI regime fit for purpose? Key differences (2017/18 rates) Tax NIC: individual pays on earnings: Employed, Agency workers(sdc), IR35 companies Fully self-employed, Self-employed Workers Broadly the same for all (slightly more generous expenses deductions for the self-employed) Class 1 Class 4 Up to 8,164 0% 0% From 8,164 to 45,000 12% 9% Above 45,000 2% 2% NIC: individual pays weekly flat rate if profits above 6,025 NIC: employer pays on earnings: - Class pw (until 2019) Up to 8,164 0% - From 8,164 to 45, % - Up to age 21 and apprentices up to age 25 up to 45,000 0% - Everyone above 45, % - 8

9 Tax and NI If giggers were subject to employee PAYE/NIC Estimated wages Approx TOTAL Employee say 3% (12%-9%) Employer Total NIC Est. No. jobs, say: c.2.2m Est. Total pay bill, say: c. 9.5bn If 90% of 9.5bn is below the NI secondary threshold: And 10% is above NI Secondary Threshold: -c. 8.6bn 900m 27 (?) 124 (?) 151 (?) PAYE likely to tax neutral, unless workers have been non-compliant in the past Under the current regime, employers would pay a 0% employer NIC on a gig economy worker aged 21 or under and earning below the Upper Secondary Threshold 3,750 p.a.) 90% of jobs are estimated to generate earnings below the Secondary Threshold The remaining giggers and their engagers could change the way they work so that earnings from any one source fall below the Secondary Threshold ( 8,164 p.a.) or giggers could incorporate Ignores increase in wages and NIC if all giggers had to be paid NMW as Workers Ignores negative impact of wage-employment elasticity i.e. potential reduction on jobs due to increase in engagers costs (through NIC and NMW). Deloitte estimate could be c. -10% (based on NIESR elasticity data) 9

10 Tax, NI and legal form But.Newton s third law Cost to engager: 10,000 30,000 30,000 Possible reaction (i) Possible reaction (ii) Sole Trader Employee or PSC where IR35 applies PSC (IR35 does not apply) Sole Trader Employee or PSC where IR35 applies Work for 3 employers PSC (IR35 does not apply) Individual's net income after tax: 9,687 9,583 9,651 24,187 21,879 25,579 25,150 Taxes payable: Corporation tax on profit ,149 Income tax (Self Assess or PAYE) ,700 3,170 3, NIC paid by individual ,113 2, NIC paid by employer , Total tax and NI: ,813 8,121 4,421 4,850 Cost per 1 net in pocket: Note: For simplicity, these examples ignore the additional costs of auto-enrolment pension contributions and apprenticeship levy, and all other on-costs of employment 10

11 Other challenges VAT Agent-Principal model vs. Worker Status VAT registration threshold Incorporation A veil over an individual s effective employment status Barrier to efficient tax collection Facilitates the lowest possible overall tax rates Switches off worker/employment rights 11

12 Total tax & NIC Tax, NI and legal form Comparative tax and NI as earnings rise from 5K to 30K 9,000 Total tax and NIC at different levels of gross income (17-18) 8,000 7,000 25,000 gross income 6,000 1,746 5,000 4,000 3,000 2, ,000 gross income 766 Employee/PSC+IR35 PSC - self employed Sole trader (no PSC) 1, Gross income 12

13 Summary Key challenges and how to address them Challenge Worker definition Employed vs. Self- Employed Boundary Sole-Trader vs. Incorporated Boundary Compliance and Boundaries Consider a new flat rate withholding tax for Workers New employment status framework in primary legislation Flexible status tests in Regulations Review CT and dividend withholding rates as applicable to PSCs Protect Revenues Consider applying PAYE and NIC to Workers + aggregation of employments for NIC Align class 1 primary and class 4 NIC rates to better reflect benefit entitlements Extend Public Sector IR35 measures to the Private Sector where IR35 applies Protect vulnerable workers Redefine Worker Status at the bottom end Relevance of Personal service / substitution? Review rights and protections available to fully self employed Review rights and protections for individuals in PSCs where IR35 applies Investment, entrepreneurialism, job creation Ensure no blurring of boundaries or misclassification of fully self-employed as employees or workers Consider whether fiscal incentives are sufficiently focussed Ensure no blurring of boundaries due to incorrect application of IR35 13

14 Sources and Citations The size of the gig economy and the numbers of self-employed Royal Society of Arts, Good work: the Taylor review of modern working practices. Royal Society of Arts, Good gigs: A fairer future for the UK's gig economy. Chartered Institute of Personnel and Development, To gig or not to gig? Stories from the modern economy. Centre for Research on Self-Employment, The True Diversity of Self-Employment. Office for National Statistics, A01 Labour market statistics summary data tables, published 18 th October Wage and Employment Elasticities Riley, R., Modelling demand for low skilled/low paid labour: Exploring the employment trade-offs of a Living Wage (No. 404). National Institute of Economic and Social Research. Employer National Insurance Contributions (NICs) rates and thresholds UK Government, Rates and allowances: National Insurance contributions (last updated 6 th April 2017). 14

15 Contact information Deloitte Mark Groom Telephone:

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