Governments are looking for ways to tax the gig and sharing economies, and fear that tax legislation is lagging behind the growth of these new economic models. Indeed, the gig economy is rapidly growing: its value is expected to reach USD 452 billion in 2025. According to official estimates, in the UK, in 2019 nearly 5 million people were working on online platforms. Most of them are young (under 34), and most of them are male.
In this article, we’ll look at how VAT is handled in the gig economy, and will use the UK’s system as an example.
Is The Gig Economy Facilitating Tax Avoidance?
In the gig economic model, the sellers (often, of fully digitalized services, but not exclusively) are individuals who are self-employed. In most cases, they have a profile on a marketplace, where they list a range of services. Customers can contact them via the marketplace and buy their services. Alternatively, sellers can use a platform such as Uber or AirBnB to offer holiday rentals, deliveries or transportation services.
Once their income reaches a certain limit (fixed by the country of tax residence, and typically calculated over the calendar year or over a 12-month period), self-employed individuals and micro companies must register for VAT and start charging it.
In the UK, this threshold is £85,000 for the past 12 months—one of the highest in the OECD or compared to EU member states. In France, for example, this limit is fixed at €34,400 for the calendar year for selling services. For the tax authorities, however, it might be difficult to determine when individuals reach these limits, and this might also depend on the tax location of the marketplace. (In fact, it’s often the individual who has a contract with the marketplace, and not with end customers).
VAT Thresholds and the Gig Economy
In the majority of cases, individuals do not cross these thresholds for a few years or more; they often use gig platforms to complete other sources of income, such as traditional employment. Oftentimes, however, they progressively withdraw from the labor market and replace their main source of income with revenue generated from freelancing and gig platforms. The change concerns higher and higher percentages of the active workforce in most countries in the world, including the UK and EU member states. For governments, salaried workers’ income is much easier to track and to tax, and they also rely on companies levying VAT on products and services. In this context, the gig economy poses an important taxation challenge.
The UK’s comparatively high threshold limit has been put in place to stimulate start-up businesses. Businesses might, however, intentionally keep their revenue under it to avoid the burden of VAT compliance. Many individuals are estimated to be using different strategies to stay under this limit, in order to avoid having to collect and remit VAT. This could progressively erode the country’s VAT system, and force the UK to rethink its current threshold system.
Bigger companies have more experience and are better equipped to handle their tax obligations and collect VAT. Self-employed individuals and small businesses might struggle with tax compliance due to having fewer resources to allocate to this task--which is, nevertheless, critical for their success.
How Can Fonoa Help You?
At Fonoa, we have developed a platform that is ready for the future and automates all aspects of your VAT obligations. If you freelance as a self-employed in your own a business, reach out to us and we can help you handle your tax registrations, tax filings and representation where needed.