Examining the tax implications of the Sharing Economy
Michael Steed, Head of Tax, BPP Professional Development.
Let’s start with a question: what is the sharing economy (aka the collaborative economy)?
Simply put, it is the common term to describe the use of disruptive technology (smart-phones to you and me), by which consumers can share under-used resources between them and make money.
The most obvious example is Airbnb, whereby worldwide owners of accommodation can rent underused rooms with other consumers.
In 2016 PwC published a report on the size and presence of the collaborative (sharing) economy in Europe. It is big (transactions were around £7.5bn in 2015 in the UK alone) and growing fast. The UK has delivered some notable success stories in this new economy, although the report identifies Deliveroo, a food delivery service,` as a rising star in the sharing economy. This is puzzling, as Deliveroo feels more like a gig-economy business (with its small army of “self-employed” riders delivering restaurant food to customers).
The report identified five key areas of the sharing economy all of which are accessed through online platforms – primarily smartphones:
- Collaborative finance: individuals and businesses who invest, lend and borrow directly between each other, for example crowd-funding (such as Crowdcube) and peer-to-peer lending;
- Peer-to-peer accommodation: households sharing access to unused space in their home or renting out a holiday home to travellers (think Airbnb);
- Peer-to-peer transportation: individuals sharing a ride, car or parking space (such as JustPark) with others;
- On-demand household services: freelancer marketplaces enabling households to access on-demand support with household tasks such as dog walking, food delivery and DIY;
- On demand professional services: freelancer marketplaces enabling businesses to access on demand support with skills such as administration, consultancy and accountancy.
The speed of introduction of such services (and it is primarily services) and the growth in both the UK and the wider European economy, is noteworthy and the UK is now widely seen as an important hub for starting such businesses, both from a tax and a regulatory point of view.
The issues that this raises include regulatory issues, such as financial regulation in peer to peer lending, as well as tax issues.
So how has the UK tax system dealt with the inexorable rise of these new and rapidly growing sectors?
Oldies but goodies!
Some parts of the traditional tax framework appear equal to the task and include: The badges of trade: which loosely tell a hobby from a trade; Rent-a-room relief (aka Lodgers’ Relief): £7,500 for sharing your only or main home with other people; Capital allowances: remember software and expenditure on websites count as plant for capital allowances; Investment reliefs: SEIS and EIS for crowdfunding websites (such as Crowdcube which claims on its website that it has raised over £220million since its inception!);Peer-to-peer lending (or example Zopa), as the returns can be greater than conventional banks and building societies.
The tax legislation is moving to cope with these changes. For example, peer–to-peer lending interest is taxable, but is listed in the Personal Savings Allowance and FB2017 is removing the need to deduct tax on interest for investors. Tax relief for irrecoverable loans is also available. The first peer- to-peer ISAs are also appearing on the shelves.
Newer legislation – FB (2) 2017 and those two new £1,000 allowances!
Two new £1,000 allowances were introduced into FB 2017 to allow “micro-entrepreneurs” to make small profits in trading and property transactions. They were subsequently dropped in FA 2017, but are in the list of provisions that will be in the second Finance Bill in the Autumn of 2017.
Both of the allowances work in the same way: if income from the activity (and note that it is income and not profits) does not exceed £1,000, then the income is ignored; it is not taxable and not reportable. If, however the income (and not profits) exceeds £1,000, then tax is due and taxpayers have a choice: they can use normal profit and loss principles and completely ignore the allowance, or they can elect to ignore the expenses completely and just be taxed on their total income less the £1,000 allowance.
There is an important point about the interaction between the £1,000 allowances and the more traditional rent-a-room allowance in Part 7 of ITTOIA 2005 (which was raised in April 2016 from £4,250 to £7,500 per annum). The critical point is that it is not possible to have the rent a room relief and either of the two new allowances.
The government is clearly exercised by the rent-a-room relief as there is a proposal in the 2017 Budget that this be restricted to longer lets only. It would appear therefore, that the Government is targeting short-term Airbnb type sharing economy activities in favour of longer-term more stable provisions of accommodation.
This is an area that we will be hearing much more of. The UK should be rightly proud of its attitude to innovation in business with a supportive tax code, although it’s noteworthy that both the sharing and the gig economies have their dark sides – we all hear stories of worker exploitation and houses being trashed having been hired through Airbnb.
Michael Steed (MA(Cantab), CTA(Fellow), is Head of Tax, BPP Professional Development and is a past-President of the ATT and is co-chair of the ATT’s Technical Steering Group.
Please note: A longer version of this blog was published as an article in Tax Adviser Magazine.