The emergence of the sharing economy poses a myriad of tax questions for businesses, consumers and tax authorities alike.
Are individuals who are participating in the sharing economy aware of their tax obligations? What kind of duty of care are platform providers taking on and what is the tax impact for them? What are the government and tax authorities doing to encourage growth within the sharing economy?
Find out more about the tax issues facing sharing economy businesses below.
As users of the sharing economy start to rent out their rooms, garages, time, skills and personal possessions to other individuals, they may in some cases start to make a reasonable income. They may not always be aware, but this can trigger an obligation to register for, and account for, both income tax and VAT. Whilst the VAT registration threshold is high for most ordinary users (currently £82,000 turnover per year in the UK), there is no such threshold on the taxation of income (beyond the personal allowance). A higher rate taxpayer who occasionally rents out his second home through a home sharing platform would need to account for income tax on the profits he makes. In addition, in countries like Germany, an individual undertaking a trading activity via a sharing economy is not only subject to income tax on the profit, but also to local trade tax (tax rates vary, fixed by the local municipalities).
The situation gets even more complex when an individual provides personal services via a platform. In some situations (where it is hard for the users to demonstrate beyond doubt that this is a self-employment or B2B situation) the tax authorities may say that the hirer has a duty to account to the authorities for income tax and/or social security deductions.
The tax authorities
In the past, profits in these sectors would normally be generated by businesses and corporates. They would be easily identifiable and such profits would be shown in annual accounts and tax returns. But the rapid growth of the sharing economy changes the rules of the game and provides new challenges for tax authorities. In the UK, HMRC started a consultation about increasing its powers to gather data about individuals who use the platforms and are perceived to be are under-declaring their sales in July 2015. The extended powers will directly affect businesses who act as intermediaries or provide electronic payment services, as they may be required to provide data to HMRC under the new legislation. They may also affect the businesses and individuals who trade or make money through these channels.
Debbie Wosskow’s ‘Unlocking the sharing economy’ report (published last year) suggested that HMRC and HM Treasury should create a guide to tax in the sharing economy, and an online tax calculator to help users of sharing economy services to easily work out how much tax they are liable to pay. This is not something that has been introduced yet but it may be a positive tool for HMRC to introduce in the future.
There may also be tax issues for platforms themselves. For example, what are their taxable supplies for VAT purposes to users and consumers and when are they acting as an agent? This will vary depending on the nature of supply and underlying services and would need careful analysis in each case.
Furthermore, in the UK, we have seen the introduction of legislation which seeks to tax employment intermediaries. Therefore sharing economy platforms via which individuals provide personal services need to navigate legislation carefully especially if they (no doubt for very honourable quality control/user experience purposes) try to control the quality of the work of the individuals in a way which might make the worker look like an employee of the platform.
Some platforms, particularly bigger players, may look to assist users by offering a service at the end of the tax year that showed users how much they had earned and the expenses they might claim against tax. Giving users clear, impartial information on what taxes they need to pay will raise awareness of what is considered additional income.
Supporting the growth of the sharing economy
Governments want the sharing economy to grow and don’t want to discourage investment and growth by creating only tax problems. So in the UK we are seeing the early blossoming of tax reliefs and opportunities – and we can expect to see much more of this.
For instance earlier this year the UK Government introduced a package of tax measures expressly designed to support the sharing economy and to “break down barriers, create opportunities for sharing space on a short-term basis”.
This included an increase in rent a room relief from £4,250 to £7,500 a year, a 75% increase. Individuals who rent out their room online or through apps or other online platforms must now make a significant amount of money each year before they are obliged to pay any income tax. The Government confirmed that the measure was intended to “reduce and simplify the tax and administrative burden” for such individuals.
The UK Government has also confirmed that it intends to encourage Local Authorities to use their discretionary powers to grant reliefs from business rates in order to “support the sharing economy including shared workspaces and marketspaces”.
The UK Government has recognised that it needs to encourage the sharing economy and is actively taking steps to incentivise people to work and grow this area of the economy.
The sharing economy is a worldwide phenomenon and each jurisdiction will tackle the tax effects in different ways. The Organisation for Economic Co-operation and Development (OECD) has considered the impact of the sharing economy already in its on-going Base Erosion and Profit Shifting (BEPS) project. At the national level, we would expect individual governments to be starting to consider how to ensure appropriate taxation of income from the sharing economy but at the same time, encouraging growth. For example, the Italian Government is expected to implement a new “digital tax” on income in Italy in the near future and in Belgium a ministerial working group has proposed to reduce VAT on some circular sharing economy services. The European Commission has announced it plans to assess the role of platforms to see if any changes or new legislation is needed (see here). So we can expect further developments both in the months and years to come!
This article is the third in a series of six weekly articles on the legal issues affecting the sharing economy. Click here to read the last update on the payments regulation affecting sharing economy platforms.
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