Taxing the sharing economy

Since we lived in caves, humans have shared our time and property with others. We do things for our friends and neighbours, sometimes for money, sometimes in exchange for a good deed in return, and sometimes without expectation of anything at all; it’s one of the things that define humanity. Thousands of years later, we’re still doing it, albeit with the help of smartphones, tablets and other things that Neanderthal man would no doubt have found very baffling indeed.

And it has a new name – the sharing economy. The explosion of connectivity has changed our lives in so many ways but one of the most unexpected is giving us the possibility of making money out of things we don’t use, or aren’t using right now, or even from our own free time – by giving or loaning them to someone, by selling them, or by doing something for someone else. Sometimes we do it for money (thank you, ebay and airbnb), sometimes for free (freecycle) and sometimes for payment in kind (home exchange, anyone?).

But there’s a cloud on the horizon, and that’s the taxman. The name ‘sharing economy’ implies something that’s not done for gain, but the fact is that most of the activity within the sharing economy is done for money, even though in most cases they’re relatively small amounts. A driver using a ride-sharing app may be doing his neighbours a good turn but, equally, he may be in it for the money. The same applies to renting out your home to strangers when you’re on holiday – a direct swap probably isn’t a business, a rental for cash probably is. These micro-businesses wouldn’t exist without the digital world we live in, but being micro doesn’t make them tax free.

Existing tax rules can cope pretty well with the idea of the sharing economy, in terms of dictating when a business becomes a taxable business. The problem is that many of the new micro-entrepreneurs of the sharing economy may be unaware of their tax responsibilities. Add to that the fact that most of the amounts involved are small, making enforcement expensive from the taxman’s perspective, and the tax authorities have quite a problem on their hands.

So what will they do? Well, sooner or later they’re going to do something about it. For example, even if 'jobs' in the sharing economy aren’t jobs as far as tax law is strictly concerned, it may well be that tax authorities will need to rewrite the rules to make them qualify as employment, for tax purposes at least.

As I talked about in a previous blog, they’ll also need to look at how tax is collected. If more economic activity moves away from large employers and into the sharing economy, this may encourage tax authorities to shift the collection or notification responsibilities, which are currently on employers, to the various app providers.

One of the most difficult questions the authorities will face is around the tax implications that come from the sharing economy crossing borders. Where should income be taxed, if the app provider is in a different place from the service provider? We can expect to see a lot of activity around permanent establishment in the coming years.

And then there’s VAT. A lot of people in the sharing economy fall under the VAT threshold but as they take more and more business away from larger, established businesses, it’s inevitable that overall VAT revenue will fall. Tax authorities are already looking at ways of adapting their rules to cope – the Australian Taxation Office, for example, has already announced changes to the law that effectively removes the Goods and Services Tax threshold for 'taxi travel' providers. I’m sure this won’t be the last case we hear about.

Applying ‘old’ rules to the new ways of doing business isn’t always the best answer - the sharing economy is causing tax authorities to look more fundamentally at digital business. We should all expect changes ahead.

John Steveni | Communications Tax Leader
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