The tax consequences of the Supreme Court’s Uber decision (Uber v Aslam)

On 19 February 2021, the Supreme Court handed down its landmark employment status judgment in Uber v Aslam [2021] UKSC 5. Leigh Sayliss and Alexandra Mizzi discuss the tax implications of the decision. 

What did the Supreme Court decide?  

The Supreme Court held that the drivers who brought the claim against Uber were workers, and not self-employed individuals, for the purposes of the workers’ entitlement to certain employment rights (such as holiday pay and the national minimum wage). The Supreme Court ruled that the contract was not the starting point when considering employment status cases—and that tribunals/courts can look behind the written contract in all such cases.

Uber’s argument that it was acting as an agent for the drivers was rejected by the Court, and the Court ruled that the control exercised by Uber over the drivers’ work was incompatible with its assertion that the workers were self-employed. Uber could not have its cake and eat it—when exercising control in order to protect its brand and user experience, it could not evade the employment law consequences.

What are the consequences of this worker category for employment tax purposes? 

Employment law has the categories of ‘employee’ and ‘worker’, and tax has ‘employment income’ (for income tax purposes) and ‘earnings’ (for National Insurance contributions), the criteria for each of these four terms being subtly different. However, although the employment law and tax regimes are not identical, they are closely linked.

The reasoning in Uber will be particularly relevant for tax purposes as one of the key elements in the decision related to the level of control that Uber exerted over its drivers. When checking whether an individual should be treated as an employee for tax purposes, HMRC is heavily influenced by the extent to which the ‘employer’ can control how the ‘employee’ does the work. While Uber may not go so far as to tell its drivers when to accelerate or brake, Uber comes close to telling them when to turn left or right (drivers who do not follow the recommended route may face a fare reduction if the passenger complains). Much of the reasoning in Uber will apply equally to tax.

While HMRC would not consider itself bound to follow an employment law precedent when deciding whether a person should be treated as an employee for tax purposes, such cases are likely to be influential, especially where the decision is from the Supreme Court. In addition, an employment law precedent that could operate to bring a large number of people into the employment taxes net is particularly likely to be one that is followed by HMRC. 

Are there likely to be any changes to the way workers within the gig economy are taxed? 

Uber may lobby for a change in the law to recognise ‘platform’ or gig economy workers as a distinct category—it and other gig economy behemoths did this successfully in California with Proposition 22. However, it appears unlikely that there is much political appetite for loosening employment or tax laws at present. Some Conservative MPs have already raised the possibility of tightening up enforcement of labour standards (possibly via a central regulator as recommended by the Taylor Review), while a mooted post-Brexit review of employment legislation was dropped in January 2021 within days of being reported. Similarly, the level playing field provisions of the Brexit deal may make it problematic to introduce legislation favouring gig economy businesses in this way. 

In addition, the current direction of movement is to try to bring more people into the scope of employment taxes as can be seen with the imminent April 2021 expansion of the off-payroll working (IR35) rules. In an environment in which HMRC is trying to bring the taxation of employees and the self-employed closer together, it seems unlikely that it is going to open up another route into the self-employed arena—especially in a growing area such as the gig economy. 

What are the VAT implications of the decision? 

To date, much of the publicity on the Uber case has focused on the employment status of the drivers, with the overflow into tax being related to the employment tax issues noted above. 

The consequences of the Uber decision for VAT are at least as important as those for employment taxes. If each driver operates a separate ‘self-employed’ business, in the great majority of cases they will be operating below the VAT registration threshold (£85,000). If it is, in reality, Uber that is operating the business, then the VAT registration threshold will be easily passed and all fares should be subject to VAT, with the end result that nearly 17% of all fares being payable to HMRC. 

VAT lives in a world of its own and so a decision that the drivers are ‘workers’ for Uber, or are ‘employees’ for the purposes of income tax, does not necessarily mean that they are operating Uber’s business in the context of VAT. Indeed, the IR35 off-payroll working rules readily treat payments to a contractor as employment income without the contractor being incorporated into the employer’s business for VAT purposes. Uber may find it extremely difficult to separate itself from drivers who contract directly with Uber or are deemed to do so. However, the position would be less clear if Uber insists on drivers working through personal services companies. Uber is likely to be looking very closely at cases such as HMRC v Secret Hotels2 Ltd [2014] UKSC 16 to see if it can create a model that can work for VAT. 

If Uber concedes, or loses, on VAT, it will be expensive. In October 2020, the Good Law Project was reporting a potential £1.5bn outstanding VAT bill. While, on an ongoing basis, some of the cost of VAT will be offset by increased VAT recovery, it is still likely to make a large dent in Uber’s business model.