Whilst the laws of the UK may be expected to reflect the values of the society in which we live, our statute books inevitably lag behind societal changes and developments in technology. The complexities of the UK’s tax legislation are considerable when applied to companies conducting ‘traditional’ trading or investment activity, but the position becomes ever more difficult, and contentious, when new business models emerge and themselves exhibit rapid change. This is particularly apparent in the case of the gig economy. On 28 October 2016, the London Central employment tribunal ruled that Uber drivers have “worker” status and are not self-employed (although we note that this ruling is subject to an appeal by Uber). Our employment team have previously written about the employment law ramifications of this judgment (on 31 October 2016 and 16 November 2016), including consideration of the distinction between an employee, a worker and someone who is self-employed. UK tax law does not recognise the concept of a “worker”, but the ruling is nonetheless not inconsequential from a tax perspective and affords interesting insights into the challenges faced in applying the tax code to such emergent platforms.

VAT - agent or principal?

If you arrange supplies of goods or services for or on behalf of someone else (a “principal”) then you may be an “agent” as a matter of commercial law. For VAT purposes, there are usually two separate supplies made in these situations: (i) supplies made between the principal and the third party, generally arranged by the agent; and (ii) the supply of the agent’s services to the principal, for which a fee or commission is charged. An example of this could be an app which links consumers with third party providers of services, such as beauty salons, taxi services or holiday rentals. Indeed, this issue is particularly relevant to online retailers and operators in the gig economy, as it can determine whether VAT should be charged on the full value of the supply of services or just the commission element for the agent. Not only can this materially affect the cash flow of a business, but it can negatively impact an operating model which relies on competitive pricing and tight margins.

The Uber situation

In the case of taxi companies, fares charged to passengers for taxi or private hire journeys are generally liable to VAT at the standard rate of 20%, assuming that the taxi company is a “taxable person”. This additional 20% can be an extra absolute cost to the public who use such services.

As a matter of observation, VAT is not generally charged by Uber drivers; Uber maintains that it stands in the role of agent as regards the taxi services. As agent, Uber links self-employed drivers with customers through its platform. As such, the onus to charge VAT (if applicable) falls on the drivers who, for VAT purposes, are making the supply of services.

An Uber driver who does not expect to receive aggregate fares in excess of £85,000 in one year would not be liable to register for VAT or to charge VAT to customers (although they might choose to register to be able to recover VAT on their attributable costs).

If Uber were, instead, the principal for VAT purposes, then the supply of taxi services would attract VAT, which would generally be an absolute and additional cost to the customer. This could reduce Uber’s competitiveness in the marketplace when compared to other operators that act as principal and that charge VAT on their fares (unless these costs were to be absorbed by the business instead of being passed on to the public, which then impacts on the business’s profitability).

Uber is currently subject to legal proceedings over whether VAT invoices should be issued in respect of taxi services provided by Uber drivers.

However, the question is by no means limited to taxi services – the same or similar questions apply for many gig economy businesses where tech-based platforms enable companies to connect the public with different service providers at the push of a button. The extent to which such platforms act as agent or principal in the provision of the main service to the final consumer can often be unclear and businesses should carefully consider the tax implications when setting up their operating structure and drawing up their legal terms of business.

What about PAYE and NICs?

The position of gig economy businesses in the field of payroll taxes is no less relevant and current. Although the test for whether payments to an individual constitute employment income or earnings that would be subject to PAYE and employment NICs is not on all fours with the employment law test of employee status, there are close analogies and many of the relevant factors are the same.

The Matthew Taylor report on Modern Working Practices published in the summer contained various recommendations for clarifying and improving the employment tax regime and how it applies to gig economy workers. A central recommendation was to align entirely the definitions of employment status for employment and tax law. As was clear from the abortive attempts to increase rates of self-employed NICs in the post-election Budget, the discrepancy between self-employment taxation levels and those applicable to employees is significant in fiscal terms and further developments in policy are expected.


Both the employment status of gig economy workers and the VAT position of the services they provide, are crucial issues for the Government and fiscal policy, and equally important to the wider economy. Advances in technology have enabled businesses to structure themselves in ways which are arguably not covered with sufficient certainty by our current legal framework. We are watching with interest to see how the area develops.

In the meantime, if you are unsure about your current arrangements or would like any further information on this issue, please get in touch with a member of our team.