As we move into a New Economy, and individuals’ make their living in new and innovative ways, the complex tax rules by which the economy abides can be even more of a challenge. How do they apply to these new business arenas, and how can individuals embarking on making their mark and bringing their ideas to life make sure they avoid a dispute?
Research recently commissioned by HMRC into tax evasion and the sharing economy and tax evasion specifically by SMEs, demonstrates that it is interested in understanding more about the causes of non-compliance.
The Sharing Economy, as defined for the purposes of HMRC’s research, refers to economic activity facilitated by the internet, through digital platforms and applications, that enables people or businesses to share, sell, or rent property, resources, time, or skills. A function of the Sharing Economy is that it brings together or ‘matches’ suppliers to customers through a common platform.
Small businesses are defined as having a turnover of up to £10m, and fewer than 20 employees, and mid-sized businesses which are defined as having either 20 employees or more and/ or a turnover of more than £10 million but less than £200 million.
The Sharing Economy particularly presents exciting opportunities for the UK government and economy. For example, it offers employment opportunities for individuals currently inactive in the labour market. A Department for Business, Innovation and Skills independent review of the Sharing Economy suggests that task-based platforms provide an opportunity for jobseekers to build their skills and gain experience, for the under-employed to obtain more hours of employment, and for individuals to find flexible work that suits their needs. As a sector, the Sharing Economy has the potential not only to save money, but to promote sustainability for individual consumers, private businesses and public sector organisations, unlocking underused assets and avoiding waste and inefficiency.
The HMRC research into this area is not surprising, as their recent statistics estimate that evasion and the hidden economy contributed £5.2bn and £3.5bn respectively to the 2015/16 tax gap.
Collectively these reports showed:
- Of those in the sharing economy contacted for the research, 54% thought their income is not taxable. However, 21% considered themselves to be employees and 12% saw themselves as self-employed in relation to their sharing economy earnings.
- 35% of those in the sharing economy had or planned to notify HMRC of that income whereas 46% considered they earned too little to report it. The reasons for not telling HMRC about their income included that it was sporadic/a hobby, taxes are too high, the government ‘does nothing for me’, a perception of not getting caught and not knowing that disclosure was necessary.
- 16% of those with a gross income from the sharing economy exceeding £70,000 thought they earned too little to tell HMRC about it. Those involved in the sharing economy for three or more years were least likely to have notified HMRC.
- Only 51% of those involved in the sharing economy considered they knew enough to fulfil their tax obligations and 17% kept no records of their income. They are more likely to get their information from HMRC although there was a general lack of awareness of HMRC’s digital services. The requirement to file tax returns deterred compliance as people viewed it as too difficult. Simpler, more regular online filing was preferred – so Making Tax Digital may be welcomed.
- Some people believe that intentionally making mistakes (e.g. not declaring stock used privately or including personal expenses in businesses’ accounts) is not an issue as ‘it’s my money’ or because they believe they pay too much tax or other businesses pay too little. For others evasion facilitates a lifestyle to which they consider they are entitled given the level of taxes paid.
- Others perceive that the likelihood of being caught is low as amounts are too small, they can think up an excuse which HMRC will believe or HMRC has too few resources to bother with their small business. ‘Systematic evaders’ tended to believe that they were not reliant on the state so they felt little sense of obligation to pay taxes.
- Both of the two previous points appear to be reinforced by media coverage of tax evasion and avoidance. The evasion research noted that news and social media commentary on high profile disputes appeared to reinforce that evasion risk for SMEs is low as HMRC’s focus is elsewhere. It also helped evaders self-justify their own evasion through the perception that others avoid and evade tax on a larger scale such that the evader believed they paid their fair share of tax.
- Some believe that the consequences of getting caught are so small that it is worth not getting their tax right. Mostly the potential impact on their business and their family was under-estimated.
- The 2008 financial crisis appeared to ‘normalise’ evasion behaviours for some businesses. Others perceived they needed to evade in order to offer competitive prices, survive cash flow crises and stay in business. Financial pressures also deterred people in the sharing economy from meeting their tax obligations.
Evasion and sharing economy non-compliance occur for many reasons including ignorance of tax obligations, a belief HMRC will never find out and that, even if they do, the consequences are insignificant.
Communication therefore seems to be the key. The challenge is how to ensure the messages reach the target audience in an era of information overload and multiple channels through which people receive news. The research suggests that HMRC’s current messages such as the publication of deliberate defaulters’ details simply do not reach evaders so more blogs or press releases appear unlikely to have the desired effect.
Helen Adams, Principal, BDO Tax Dispute Resolution.
Helen’s full blog on the HMRC research and what solutions it may need to seek was originally published by Tax Adviser, Jan 2018, and reproduced with permission. Click here to read the full article.