The sharing economy, exemplified by popular apps and platforms such as Uber, Airbnb and TaskRabbit, is exploding and people are finding new ways to earn a living by exploiting their assets and skills – for example, by letting out a spare room, or becoming a chauffeur or chef for the evening. However, the informality of this new economic ecosystem means that tax systems worldwide, and the platforms themselves, are also finding that they need to adapt.
In the United Kingdom, the tax treatment of those who provide services through sharing platforms and those who provide goods and services through more conventional channels is broadly the same. Self-employed persons are required to pay income tax on the profits of their trade, profession or vocation by self-assessing their own tax liability and declaring it to HM Revenue & Customs (HMRC) in their annual tax return. For those who, in broad terms, turn over an amount that is greater than the VAT-registration threshold (currently £82,000 in the UK), a further consideration is whether it is necessary to register for and charge their customers VAT (at rates of up to 20% which, depending on the price elasticity of the service, can have a significant impact on profitability if the economic burden cannot be passed on to the consumer). This structure is replicated across many of the Western economies. Additionally, many jurisdictions also levy specific taxes on certain sectors of the economy - such as 'tourist' or 'occupancy' taxes on hotel accommodation – and in many cases rely on the honesty of those who are supplying goods and services to register for and pay the correct amount of taxes.
Initially, many sharing platforms positioned themselves as intermediaries whose role was to bring providers and consumers of services, together. Responsibility for dealing with tax compliance and accounting for taxes was left squarely within the remit of the service provider. However, criticism of this approach in the popular media has mounted, with some commentators suggesting that platforms are facilitating tax avoidance by enabling unscrupulous service providers to dodge their compliance obligations – particularly in relation to taxes such as VAT/Goods and Services Tax (GST) with which many first-time sharers are not familiar.
This extent of this criticism is perhaps unfair, given that tax compliance is a matter of personal responsibility and those who choose not to comply with their tax obligations will probably find a way not to do so regardless as to how they generate their revenue. Nevertheless, one cannot dispute that the growth of the online economy has opened up previously inaccessible marketplaces, with the potential to multiply small-scale tax compliance failings resulting in a significant loss of revenue to governments – particularly as 'sharers' erode the market-share of more established, 'traditional', service providers. Indeed, some of the most vociferous criticism of the sharing economy has come from trade associations representing traditional service providers who have suggested that tax non-compliance offers 'sharers' a competitive advantage. This has been the case worldwide with, for example, calls for HMRC and the Canada Revenue Agency to investigate the Uber platform. The danger, though, is as much equating a traditional business model with tax compliance, as making new business models synonymous with non-compliance.
In a bid to stem criticism the platforms have responded. It was, for example, recently announced that Airbnb has modified its platform to collect the Parisian Taxe de séjour by imposing a levy of €0.83 per night on bookings in the city, in addition to similar collection arrangements adopted in cities including Amsterdam, San Diego and Washington D.C..
Tax authorities are not, however, waiting idly for platforms to address perceived compliance failings. In the UK, for example, HMRC has launched a consultation on extending its data-gathering powers to tackle what it terms the 'Hidden Economy' businesses which fail to register for tax and individuals who fail to declare their income which, it estimates, costs the UK exchequer some £5.9 billion in lost revenues. Under consultation are extensions to HMRC's data gathering powers, enabling it to compel electronic payment providers and business intermediaries (i.e. platforms such as Airbnb, Uber and eBay) to provide information about transactions made through those platforms. In 2013, HMRC received enhanced data-gathering powers meaning it already has the ability to collect data from credit card payment processors; the proposed extensions to its powers have the aim of future-proofing its powers to allow it to target new and emerging business models and payment methods - such as digital wallets which operate outside the traditional banking system.
Care should, however, be taken to ensure that these new powers do not vilify those who participate in the sharing economy by branding all 'sharers' as tax evaders. In 2014 the Government commissioned a report "Unlocking the sharing economy", which commented that:
Users of sharing economy services have reported that it can be difficult to calculate exactly how much tax they need to pay when they make money from the sharing economy
and went on to recommend the creation of specific guidance and an online tax calculator, to enable users of the sharing economy to calculate how much tax they are actually liable to pay. This approach, at least in part, has been adopted by the Australian Taxation Office which recently issued guidance specifically targeting those who provide sharing economy services – notably classifying Uber as a taxi service, meaning that its drivers must register for and account for Australian GST (although it is understood that Uber is challenging this guidance).
Ultimately, tax compliance is a matter of personal responsibility and, while the sharing economy is creating economic opportunities for many, it does have the potential to create, as termed by HMRC, a hidden economy. It is, however, unclear who should police the boundaries of this economy – with tax authorities ostensibly seeking the cooperation of platforms and intermediaries in ensuring that what they perceive to be the correct amount of tax is paid without branding all 'sharers' as tax evaders.
HMRC's consultation on Tackling the hidden economy: Extension of data gathering powers closes on 14 October 2015. View the consultation document, and details of how to respond