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Changes on the way for the Gig Economy

What’s the issue?

The government has been given a strong signal that changes are needed to tackle perceived problems with the so-called “gig economy”.  For Freelancers and the companies that engage them these proposals could amount to a significant change to the way they operate and they will need to keep a close eye on this area in the post-election period.

What is the “gig economy”?

The “gig economy” refers to businesses that encourage individuals to take short-term engagements (“gigs”) on a freelance basis rather than taking the individuals on as permanent employees.  This way of working, while not particularly new, has increased in prevalence in recent years, particularly with online service providers, such as Uber and Deliveroo, using “casual” workers to provide a flexible service that can undercut other, more traditional, providers.

What’s the problem?

The gig economy can provide a mechanism for individuals to work flexibly as and when it suits them, while giving the companies access to a workforce that allows them to provide their services in an efficient way.  However, this can raise employment and tax law issues.  Some view the arrangements as potentially exploiting workers and inappropriately reducing the tax and national insurance bills of companies working in this way.

By engaging workers on a freelance basis, the companies believe they are not liable to provide employment rights, such as sick pay, pension provision and holidays.  By working as “self-employed”, the individuals pay a lower national insurance rate, while the engaging company is not required to pay secondary national insurance contributions.  In addition, as the final service is provided by the individual workers, rather than the engaging company, VAT may not be charged on the price.

What’s happening?

The Courts have already had to address some of the issues and now the Parliamentary Work and Pensions Committee has discussed the matter.  Earlier this year the Committee published a report that had some harsh words for the companies involved:

“Companies in the gig economy are free-riding on the welfare state, avoiding all their responsibilities to profit from this bogus "self-employed" designation while ordinary taxpayers pick up the tab... The companies get all the benefits, while workers take on all the risks and the state will be expected to pick up the tab, with little contribution from the companies involved.” (Frank Field, Chair of the Work and Pensions Committee)

The Committee’ report contains a number of recommendations, including

  • the national insurance contributions for self-employed individuals should be brought closer to that for employees to reduce the incentive to attempt to designate workers as self-employed for tax purposes; and
  • that the legal status of workers should be reviewed to ensure that they can benefit from employment rights even if not, technically, employees.

The tone of the Committee’s comments suggest that the Government will be put under pressure to bring in changes along the lines of the proposals, possibly in the first post-election Budget.

What is our advice?

We believe that HMRC will continue to review this area. There is mounting pressure to both harmonise tax and national insurance rates for the self-employed and employed as well as to clarify the “grey” area of what constitutes self-employment.

We’ll be keeping a close eye on this and will report back on any changes through Twitter, LinkedIn and our regular tax and accounting technical seminars. To register your interest in joining our mailing list including attending our next seminar please email jessica.williams@ecovis.co.uk