Rishi Sunak is considering toughening up VAT rules for the Uber drivers and Airbnb landlords central to the rapidly expanding sharing economy as the Treasury considers ways of repairing the damage to the public finances caused by the Covid-19 pandemic.
The chancellor has taken the first steps towards increasing the government’s VAT revenues with the publication of a consultation document calling for feedback from digital providers and their competitors.
Sunak is concerned that the rapid growth in the sharing economy has eroded the tax base because many of the 5 million-plus people providing services through online platforms earn too little to be registered for VAT.
According to pre-crisis estimates the sector was on course to have revenues of £140bn in the UK by 2025.
In a sign that the chancellor could be considering rapid action, the consultation period ends in early March, shortly before the expected date of the budget, delayed from this autumn as a result of the pandemic.
Sunak is aware that many of those involved in the sharing economy, especially drivers who were already struggling to get by, have been severely impacted by the loss of business caused by the pandemic.
But he is also looking to raise revenues after being told by the independent Office for Budget Responsibility that the government was on course to run a record peacetime budget deficit, or gap between government spending and tax income, of £394bn – almost 20% of national output – this year. Last month a report commissioned by the chancellor recommended an overhaul of capital gains tax that could raise up to £14bn a year.
The Treasury paper released on Wednesday noted that the five big sharing economy sectors in the UK: collaborative finance, short-term accommodation, passenger transportation, on-demand household services and on-demand professional services , could secure a 20-fold increase by 2025 in the total value of transactions from just £7bn in 2016. At the time, the consultancy firm PwC predicted 30% annual growth in the sharing economy.
Sunak believes that as more people buy services from non-VAT registered providers through digital platforms he is being deprived of tax revenues needed to fund public services. Currently, a business only needs to register for VAT if it has annual revenues above £85,000.
The Treasury said it had no precise figures for the number of sharing economy providers that were registered for VAT and this made it difficult to put a figure on the revenues “at risk”.
The consultation paper said the digital economy created “huge opportunities for the UK’s economy and society through stimulating enterprise and aiding optimal use of scarce resources. However, the government is also aware that it could potentially create certain challenges to the VAT tax base.”.
After listening to both sides of the argument, the Treasury said where appropriate it would come up with a response that would “ensure fair competition and a level playing field for all businesses, whether operating in the sharing economy or as a traditional business, regardless of their size and location”.
The consultation paper mentioned no specific company but said the sharing economy was normally about hiring out labour or renting out assets, or a combination of both.
“An example of hiring out labour would be offering to perform household repairs and building works. An example of renting out of assets would be an individual placing their apartment for rent as a short-term letting. An example of combining labour and assets would be a driver offering passenger transport using their personal car.”
In the previous full financial year, VAT contributed £130bn to the state’s coffers, with most of the goods and services eligible for the tax paying the main rate of 20%.