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U.K. government wakes up to downside of gig economy

Permanent employment is taxed much more heavily than other forms of work
Gig economy
REUTERS/Toby Melville/Illustration

By Carol Ryan

LONDON (Reuters Breakingviews) - A growing gig economy and tax system that rewards self-employment could hit the United Kingdom government's coffers. Jobs created by the likes of Uber flatter Britain's unemployment rate, and have helped to smooth out the worst effects of the financial crisis. But the less palatable implications of a surging gig economy are now dawning on Westminster: a potential 3.5 billion pound gap in tax receipts by 2022.

Technology is changing old employment patterns. Online labour – where workers pick up piecemeal assignments on platforms like Freelancer.com or TaskRabbit - is growing in volume terms by 10 per cent annually in the U.K., according to the Online Labour Index. Tens of thousands of individuals in Britain are driving Uber passengers or ferrying vindaloos for Deliveroo. Offline, there has also been a shift towards temporary work, such as zero-hours contracts, as companies try to marry their labour needs more closely with customer demand.

The trend has worked in the U.K. government's favour until now, with casual - if lower quality - work helping to drive the unemployment rate down to an 11-year low of 4.8 per cent. And a flexible labour force offers its own advantages. But so far, it has been left to the courts to assess the difficult questions the likes of Uber pose for workers' rights.

The government's laissez-faire attitude may change for hard-nosed reasons. The gig economy, coupled with the way the tax system is set up, is driving more people into self-employment. Around 40 per cent of the roughly 2.2 million new jobs generated since the beginning of 2008 fell into the self-employed category, Office for National Statistics data shows. The shift can't entirely be explained by digital upstarts. Half of these self-employed jobs are part-time, where many gig economy jobs are thought to show up in official data.

The government's interests look better served when people are in permanent employment, which is taxed much more heavily than other forms of work. The 3.5-billion pound hole, forecast by the U.K.'s Office for Budget Responsibility (OBR), is partly because the tax system incentivises self-employment by requiring much lower national insurance to be paid. The OBR forecasts a 2.8 billion-pound uptick in corporation tax by 2022, but a six billion pound-plus drop in income tax and national insurance contribution losses.

Not all this is driven by the gig economy. But with corporation tax rates ticking down, the incentive for freelancers to set up an incorporated company could also increase. It turns out that old-fashioned employment serves the government's interests as much as those of workers.

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