17 December 2021

The Government should capitalise on the sharing economy, not tax it to death

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I recently came across a start-up based on a premise that’s hard to argue with: babies don’t stay the same size for long. In fact, the average baby outgrows seven clothing sizes in two years. No wonder founder Eve Kekeh describes it as ‘the ultimate fast-fashion’. Her baby clothing rental business, Bundlee, appeals to eco-conscious parents who want to cut down on waste and save money at the same time.

I met Eve at a (virtual) roundtable on the sharing economy earlier this year. Her business is a great example of how wide-ranging the sharing economy space is. Airbnb and Uber might be the first businesses to come to mind when you think of the sharing economy, but this new way of doing business is affecting every sector and British start-ups are at the forefront.

Unfortunately, innovative businesses often come up against outdated rules and regulations. In Bundlee’s case, they have been locked out of the Enterprise Investment Scheme, a powerful tax break used by most venture-backed start-ups to attract investment. The problem is that rules designed to prevent low-risk ship-leasing businesses from abusing the scheme are hitting genuinely innovative sharing economy businesses like Eve’s.

Most entrepreneurs do not want special treatment from government, they just want a level-playing field. That was a common theme among the entrepreneurs cited in the All-Party Parliamentary Group for Entrepreneurship’s new report on the sharing economy.

Their key concern is that rules on VAT will change, putting them at a disadvantage compared to their offline, old-school competitors. You can see why they are worried. Earlier this year, the Treasury held a consultation into increasing the level of VAT paid by sharing economy platforms. Under the status quo, platforms such as Uber and Airbnb pay VAT on their cut (i.e. the booking fee), but the responsibility for paying VAT for the bulk of the transaction is left with the driver or host supplying the service. If the host or driver trades under the £85,000 VAT registration threshold, then the service will mostly be untaxed.

The High Court recently ruled that when customers use a ride-sharing service like Uber or Bolt, they enter into a contract with the private hire operator, not the driver. The BBC reports that this could mean that Uber and Bolt will be forced to add 20% VAT to every trip as a result. If similar rulings are applied in different industries then the tax system will need urgent reform.

As the sharing economy grows, the Treasury is understandably concerned about the set-up. But fiddling with the rules on VAT will create major problems for sharing economy start-ups. Take the cleaning platform Housekeep, which matches cleaners with customers. If they were forced to apply VAT in full to every clean booked through their platform, then customers and cleaners would soon leave the platform. After all, there would always be lower-taxed offline alternatives, not least old-fashioned word of mouth.

For consumers, it would mean paying more for convenience. For workers, it would mean less flexibility, more uncertainty, and fewer customers. Housekeep’s founder Avin Rabheru told the APPG for Entrepreneurship:

‘Applying VAT on cleaner income earned through an agency, but not applying it on income earned directly, would essentially kill our business model. it’s clear that this doesn’t fit with the concept of level-playing fields between different models.’

In the case of Uber and Bolt, it would put them at a clear cost disadvantage compared to black cabs, who will still be under the VAT threshold. You may even see some businesses change their models to avoid the risk of being hit with VAT, which could lead to worse services and fewer consumer protections.

The Government should act to ensure that the level-playing field between new online businesses and old offline businesses is preserved. It would be negligent to allow court rulings to create a state of affairs where innovative, online businesses are taxed, but traditional offline competitors aren’t.

More than half of the UK’s consumers access services through sharing economy apps and platforms. They are successful because they provide more choice in a more convenient way, often at a lower cost. It is a shift welcomed by workers too, who have become more productive because of the platforms.

MPs and ministers should be looking at how to capitalise on the trend. But if they’re not careful tax changes pushed by a revenue-hungry Treasury and court cases about employment rights could hamstring the sector.

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Sam Dumitriu is Research Director at The Entrepreneurs Network.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.