Will Rishi tax the sharing economy?

The last time a Chancellor tried to tax the Gig Economy, it didn’t end well. Philip Hammond’s plan to increase the National Insurance contributions paid by the self-employed led to an embarrassing U-turn. Months later, when the Office for Tax Simplification recommended the Chancellor lower the VAT registration threshold from £85,000, he wisely, at least from a political perspective, chose not to pick another fight with sole traders.

Another dust-up might be on horizon. The Treasury has issued a call for evidence on VAT and the Sharing Economy. They seem concerned that sharing economy platforms such as Uber, Deliveroo, and Airbnb are not paying their fair share of VAT.

Take the case of Uber. Under the status quo, Uber only pays VAT on its cut of the transaction while the money going to the driver is typically untaxed. This is because, for VAT purposes, the driver is a separate business and will almost never earn more than the VAT registration threshold. The extent to which the recent Supreme Court ruling changes this is unclear. The same is true of Airbnb, Deliveroo, and TaskRabbit.

As the sharing economy grows, more and more transactions will be exempt from VAT as a result. This understandably is concerning for the Treasury. After all, VAT brings in around £130bn each year.

They’ve also noticed the traditional case against lowering the VAT threshold, that it would be overly bureaucratic for sole traders, might not apply when a multi-billion platform can handle the grunt work on their behalf.

But while the revenue loss is a key concern for the Treasury, the effect on consumer behaviour should also be looked at closely. The aim for policymakers should be to avoid distorting consumer choices by arbitrarily favouring one service over another.

The hotel industry, for example, has argued that Airbnb rentals enjoy an unfair tax advantage over traditional hotels. If I ran a VAT registered hotel and my bookings suddenly dried up as travellers switched to cheaper non-VAT registered Airbnbs, then I would be entitled to feel a little cheated by the taxman.

The tourism sector has suggested lowering the registration threshold for accomodation to £5,000 to balance the playing field. In this case, taxing sharing economy platforms may reduce the impact of VAT on consumer behaviour and encourage competition on the merits (price and quality). 

But in many cases, applying VAT to sharing economy businesses could give offline businesses an unfair advantage. Take the case of household services like cleaning or childcare. If you use a platform or agency, instead of responding to an ad in the local paper or Facebook, you would end up paying 20% more. It would put platforms at an unfair disadvantage and discourage innovation in the sector.

This would also be the case for private hire vehicles. The Call for Evidence singles out digital platforms. But it is far from clear why minicabs booked over the phone should be taxed at a lower rate than minicabs booked via an app. We shouldn’t be nudging consumers towards services that are potentially less safe (i.e. not tracked by GPS) and more likely to be cash in hand (thus harder to properly tax).

This isn’t the only problem for competition. Even if you made sure VAT applied to all minicabs, app-based or traditional, it would still create a massive advantage for Black Cabs which customers can hail from the street. In the case of London, this would come on top of allowing them to use bus lanes and to avoid paying the congestion charge.

Before they act, the Treasury should also think hard about driving people towards the grey economy. Many sectors with high levels of tax evasion (the cash-in-hand economy), have moved out of the grey due to sharing economy platforms. Pushing people towards the informal economy would not only make it harder to protect consumers, but it would also reduce the overall tax take.

What should the Chancellor do then? One principle he should stick to is neutrality between online and offline. My decision to hire a cleaner through an app or through word-of-mouth should have nothing to do with the tax system.

A sector-by-sector approach could have advantages here. Hotels do have a legitimate gripe about the status quo. I would probably use airbnb less and hotels more if Airbnbs cost 20% more. At the same time, singling out the sharing economy for VAT in sectors where the alternative for most consumers are unregistered sole traders seems unwise.

This debate has high stakes in the UK due to our high VAT threshold. If the threshold were reduced closer to the European average then the case for reform would be weak. It would also remove damaging disincentives to grow sales. Most private hire vehicles, whether minicabs, Ubers or black cabs would be forced to register. The issue is that lowering the threshold would mean higher tax bills for scores of SMEs and sole traders. 

A middle way where the VAT Registration threshold is lower, but smaller traders can offset payments or access additional help in the years after registering, might be the best option. But designing it would be tricky to say the least.

If you’re an entrepreneur and want to give your thoughts to HM Treasury. You can read the terms of the call for evidence here. The consultation closes on March 3rd.