From zero to hero: tax in the gig economy

The gig economy is expanding – recent ONS figures suggest that zero hours contracts have tripled since 2012.

Over 900,000 people now work some or all of the time this way, compared with just 190,000 just seven years ago.

So what do businesses need to know about employment law and tax responsibilities when they take on gig workers? What do the workers themselves need to know? And what are the impacts on accountants and bookkeepers?

What is gig working?

Martin Brown is Director at PKF Francis Clark. “The first issue is to define what we mean by gig working – because it covers different things that have different tax implications.” As a society we’re experiencing a move towards more freelancers, “and with that, a move towards an economy based on more fluid and part-time working arrangements.” This, inevitably, brings tax implications.

There are pros and cons of zero hours-based contracts for both provider and engager. To take the classic example of an Uber driver, you have flexibility and are able to work times and hours that suit you; and from the engager’s point of view, you don’t have to pay hours when the demand isn’t there. However, the risk for the worker is that you can’t guarantee work if you need a certain amount of income; and the risk for the engager is that you can lose good workers when you need them.

“We need to use the word ‘engager’ rather than ‘employer’,” explains Brown. “It’s important not to use words like ‘worker’ and ‘employer’ casually – because from a tax point of view, those definitions have very particular meanings.” A person hired by an organisation can be an employee, can be self-employed, or can be a worker. We might describe ‘workers’ as a halfway house between the first two categories. “They have some of the employment law protections than an employee would; but not necessarily all of them.”

Yet although there are three statuses for employment law, there are only two statuses for tax. This complicates matters – “you can have someone who is for employment law purposes an employee, but for tax purposes has to fit either into the category of employee or self-employed.” And as an engager, you have the responsibility to check. “If you’re a worker, should you have rights to sick pay and holiday pay? Are you getting the right level of national minimum wage?” If you’re an employee, this data will be on the payroll and there will be checks and balances in place to ensure that people are getting paid correctly. “But if you send in an invoice, there are rarely those systems in place to ensure you’re being paid correctly; and the paying party is responsible for getting it right.”

Know the difference

The advice for bookkeepers and accountants – and indeed, for all businesses considering taking on zero-hours workers or using freelancers – is to be aware of these complications and know the difference between the categories.

But, “it gets more complicated,” says Brown wryly. “So far we have three scenarios. If you count as an employee you will be taxed via PAYE and Class 1 National Insurance. If you’re self-employed, you will be taxed via income tax which is not deducted at source, and pay Class 4 NI at a lower rate. The third scenario is that you are self-employed for employment purposes, but employed for tax purposes.

People who are self-employed but whom the company does not engage directly – such as those with a personal service company – fall into this category. Here, the obligation to assess what tax you should be paying falls on the provider, not the engager. “The trend towards doing this is concerning HMRC because of the reduced tax take associated with personal services companies. They pay tax at corporation tax rates, and then put the profits back into the company.” This means that HMRC “is taking less tax overall than if the same work had been done by an employee or a self-employed person.”

Accounting for differences

How can you tell whether you should be regarded as an ‘employee’ or not – is it the amount of time you work for the company? “No. It’s not that straightforward.” Ultimately, whether you are employed or self-employed comes down to who takes the financial risk. “Say I have an engagement to provide a thousand hours a year of services to an end user,” Brown says. “If I produce sub-standard work and I then spend two thousand more hours fixing it, it’s my cost and I would be regarded as self-employed. If, however, I do the thousand hours as agreed and then the engager solves the problems or pays me overtime to fix them, then from HMRC’s point of view you would be in the territory of an employer.”

On the other hand, “if I decide not to turn up at a fixed hour, or send someone else along in my place, these are indications of self-employment.” For Brown, the important thing to remember is that “there are a lot of factors to look at, and the weight you give to one factor is not definitive.” Again, the advice is to be aware of the differences, and act accordingly.

Does Brown think this situation is too complicated, and does HMRC need to address it?

“Yes – and indeed things may well change in the very near future.” For example, “there is a scheme for the construction industry whereby if you meet certification standards as a supplier, the engaging party can pay you gross and they make the tax payment for you. If you don’t have this certification, you suffer a withholding tax deduction, which you can only claim months later when you fill in your tax return.” This creates a precedent that could be used more widely in future. “However, this is not frictionless. It creates an administrative burden because there are different payment statuses for different people. Rolling that out more broadly may lead to resistance.”

A continuing trend

Ultimately, “it is a very complicated, and this is a huge policy issue. There are reasons for individuals to choose to move in the self-employed direction – on balance, as an individual you do pay less tax.” Recent attempts to address the imbalance between the National Insurance payments self-employed people make compared with employees have caused problems, with the counter-argument being that self-employed people take on more risk by not being guaranteed work. “Are you better off being employed, or self-employed? It’s debatable.”

Should there be different tax rules for different types of employees? That’s debatable too. The take-out for bookkeepers and accountants is to be aware of the different rules, and be careful that when you take on “gig workers”, both the company and the provider know their obligations.

Mark Blayney Stuart is Business Journalist of the Year, Wales Media Awards 2017 and Former Head of Research at the Chartered Institute of Marketing.