The Uber Case Part 2 of 3 – Are “Workers” Employed or Self-Employed and Other Implications of the Case

On the 16^th of March 2021, Uber committed to paying their workers at least the National Living Wage and holiday pay. This comes as a result of a recent Supreme Court ruling, which concluded that the app drivers are ‘workers’. Uber went one step further. They announced that, on top of the free insurance provided to the drivers, they will also enroll them into a pension plan.

This has left legal and tax experts in a quandary on whether there are any income tax and national insurance implications. Pressure is now being put on HMRC to clamp down on Uber as up until now, it has not had to pay VAT on fares due to the self-employed status of their drivers (almost all of whom will be below the £85,000 threshold at which the operator must register for VAT). Campaigners estimate that this bill could be more than £2 billion based on the 60,000 plus drivers based in the UK!

Furthermore, Richard Murphy of Tax Research UK, speculates that the Supreme Court’s decision could lead to a clampdown on Uber across the EU: “If they’ve got a VAT liability in the UK, my suggestion is they have a VAT liability in every country in the EU as well. They have got a substantial VAT bill.”

This won’t be something that Uber will end up facing alone. An Uber source had said that Uber hasn’t been resisting the VAT clampdown, they’re just looking for a level playing field. They would like to see the same rules apply to all its competitors in the so-called platform economy. It looks like this is what’s happening. The chancellor has launched a review of the platform economy that could lead to action over firms that pay little VAT. The consultation period ends next month.

Paul Jennings, Partner at Bates Wells, pointed out that the implications of this ruling go “to the heart of Uber’s business model”. However, it isn’t just Uber that will face the consequences. Lawyers predict that the likes of Deliveroo and other food delivery services will be next in the line of fire. Jennings commented that the judgement will be “directly relevant to other gig employers” due to “clear similarities and parallels” between the Uber app technology and that used by others.

Legal Status vs Tax Status

As mentioned in Part 1 (link), employment law distinguishes between three types of people, but taxation only recognises the first 2:

1. Those employed under a contract
2. Those self-employed who undertake work for their own clients and customers and are in business on their own account
3. Those classified as workers, more correctly defined as:

Limb (a) worker – an individual with a contract of employment but, who is not an employee

Limb (b) worker – an individual with a contract other than a contract of employment who is entitled to basic employment rights including national minimum wage but not unfair dismissal.

Some statutory rights are only applicable to employees working under a contract of employment. However, other rights, such as those claimed in these proceedings, are applied to all ‘workers’.

Figure 1 The distinction between legal status and tax status

The case clearly puts Uber drivers in the ‘Worker’ category. The repercussions of this extends further than the issue of statutory or contractual rights to the workers. There is a wider reaching, and potentially expensive, problem on the horizon: where do they sit for tax purposes? Blanket decisions cannot be made for all ‘workers’. They sit in a grey area overlapping the boundaries between employed and self-employed where confusion over tax implications has existed for the last two decades following the introduction of IR35. Furthermore, with new technologies emerging at an ever-increasing pace, this grey area is continuing to expand at a rapid rate as the platform economy grows. It is imperative that legislation keeps up with these developments in the labour market.

The distinction between employed and self-employed has become increasingly blurred and has been hotly contested by HMRC, tax advisors and contractors. Uber drivers are generally not operating inside limited companies and the IR35 legislation does not apply. However, HMRC may now have a prima facie case to argue that these “Workers” are actually Deemed Employees. If such a liability is proven, the Employment Costs bill that Uber may face will be even bigger than the estimated £2 billion VAT bill!

In the final part of “Not All’s Fare in Taxis and Employment Law,” we look at the taxation grey area and explore whether Employment Costs are now deemed to be due in the same way as Employment Rights and, if so, who will foot the bill?

Extra Reading:

The VAT issue opens up a whole different debate that is explored in the HM Treasury document “VAT and the Sharing Economy: Call for Evidence” written in December 2020. This document looks at the VAT challenges that the Sharing Economy (a socio-economic system built around the sharing of resources – often facilitated by digital platforms that can be based anywhere in the world) creates and puts forward a call for evidence from businesses which ended on 3^rd March. The results are due within 12 weeks and it will be interesting to see HM Treasury’s stance, and whether the Uber case has impacted their viewpoint.