Should Tax Rates Be the Same For the Self-Employed In the Gig Economy and the Employed?

Posted on May 2, 2017
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“The Gig Economy Could Cost the IRS Billions of Tax Dollars”, screams a Fortune magazine headline. Across the Atlantic, the Guardian informs us that the “booming gig economy costs £4bn in lost tax and benefit payouts” to the UK government. Stat after stat highlights the fact that the proportion of people employed in the gig economy, is rapidly increasing by the day. It is estimated that about 30% of the UK workforce is employed in the gig economy, doing anything from food delivery to freelance web development and everything in between.

In the past, the debate about the gig economy generally focused on the status of these workers, especially in relation to the companies through which they got their ‘gigs.’ Were they independent contractors or workers in the traditional sense of the word? Lawsuits against Uber, Deliveroo and Pimlico Plumbers brought these issues to the country’s consciousness, with the companies being accused of depriving workers of rights like holiday and sick pay and a guaranteed minimum wage. Even the UK House of Commons has gotten in on the act with its own denouncements.

However, in recent times, that debate has developed a parallel narrative – one which, while not exactly casting workers in the gig economy as villains, certainly questions the seemingly unfair advantages that they enjoy. According to the Institute for Fiscal Studies (IFS), self-employed people enjoy a £1,240 tax benefit over full-time employees. While that tax benefit is meant to reflect the fact that, unlike employees, the self-employed do not benefit from legal rights such as minimum wages, sick pay, and holiday pay, it “cannot be justified by what are now only very slight differences in benefit entitlements”, said the IFS.

Coupled with various reports questioning how much the government is losing in taxes due to self-employment, it comes as no surprise that the British Treasury is growing increasingly concerned about tax avoidance by self-employed people in the gig economy. Nobody likes to lose money, least of all governments, so it’s no wonder that governments are setting their sights on that ever-growing sector of self-employed people who make up the gig economy. In his February budget speech, UK Treasury chief, Phillip Hammond suggested there had been a “dramatic increase” in the number of people working as self-employed, implying that the reason was attributable to “differences in tax treatment”.

Outside of government, there is also an increasing clamor for the government to enforce the same tax rates for both conventional employees and workers in the gig economy. But is such a step justified? Let’s take a look at the argument for both sides.

Why all workers should have the same tax rates

For opponents of different tax rates, the benefits of being self-employed are said to erase any disadvantages that come with it. Benefits such as time and location flexibility are perks many employees can only dream of; add in the lower tax rate for the National Insurance Contributions (NICs), for instance and it seems that self-employed workers are really milking it. While conventional employees pay 12% NIC, self-employed workers pay 9% on net earnings above £8,060. Such disparity between the rates paid by the self-employed and employees “undermines the fairness of our tax system”, said Mr. Hammond.

Why a common tax rate is “unfair”

For opponents of different rates (mostly those who work in the gig economy), it makes sense to get tax breaks due to the rather precarious nature of their working arrangement. Being neither workers nor employees, they do not enjoy the many perks that regular workers do. Employees enjoy generous benefits like bonuses, pensions, sick pay, paid holidays and maternity leave, and of course, a well-defined and regular income. Self-employed workers have none of that. They are not assured of regular income or even minimum wage for that matter. Furthermore, self-employment means risk taking and incurring costs that an employee would not bother with. Sourcing and maintaining customers as well as generating an income, requires incurring expenses like internet and phone bills, insurance costs and office or home office expenses among many others, all of which the employee does not have to deal with.

Simon McVicker, Policy Director at the Association of Independent Professionals and the Self-Employed (IPSE), the trade body for self-employed workers in the UK, asserts that if self-employed workers are to be charged the same tax rate as employees, then the British government must commit to addressing the injustices and unfairness in the self-employed tax system. For example, a situation in which a female employee gets maternity allowance and is allowed a few weeks off is not exactly fair, when this is a luxury that is out of reach to self-employed pregnant women and new mothers.

Furthermore, consider that self-employed workers pay their lower tax from earnings which are often epileptic as the frequency of getting jobs on the gig platforms are not guaranteed. For the fully employed, these taxes are deducted from a steady monthly paycheck that stays constant, regardless of work situation.

There is no doubt that the odds are firmly stacked against the self-employed. Many of the benefits that employees take for granted are not to be sniffed at, and if they cannot be enjoyed by workers in the gig economy, then it makes sense that those workers should be able to offset these disadvantages through tax breaks. On the other hand, it is important to maintain a fair and credible tax system that does not leave some sections of the workforce feeling cheated. So the argument for a common tax rate is understandable in this context. However to truly level the playing field, the government would then have to commit to providing the self-employed with the same benefits – pensions, sick leave, paid maternity leave, insurance and other perks not currently enjoyed in the gig economy. It is only in this way that a parity of benefits and a fair tax system can be achieved.
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