Defining the gig and sharing economies for VAT

The internet, and major online marketplaces, have enabled businesses and people to buy and sell goods and services on a hugely expanding scale in the past five years. The EU Commission estimates online e-commerce is worth €550 billion per annum. This blog is part of series from an article first published in British Tax review.

VAT Calc’s Advisor and Auditor services can help on determining and reporting the correct VAT or GST on gig and sharing economy transactions around the world.

The digital gig and sharing economies constitute a newly emerging subset of this online market in which individuals trade services directly with each other. This subset can be characterised as follows:

1. It covers transactions between individuals for labour-based services, skills, capital, assets and other property.
2. Transactions are temporary only, with no transfer of legal title of any goods.
3. The time and the assets being traded by individuals are often underutilised resources, and are, therefore, open to commercial exploitation.
4. It is centred around any of an expanding group of online marketplaces which enable some element of: introductions between both parties to the transaction; agreeing terms; delivery (see below); and payment processing.
5. Often, these marketplaces contract with the individual supplier, and the marketplaces act as the contracting party to provide the service.
6. Businesses, including food delivery businesses, are participating increasingly as the supplier of services.
7. The marketplaces’ “facilitation” role is becoming significant in determining VAT (and other tax/employment) treatment.

Separating the gig and sharing economies

Both the gig and sharing economies are defined as enabling individuals (but also businesses) to offer their resources on very flexible terms to a whole world of potential customers that they would not have been able to reach economically in the pre-digital age. Thanks to online marketplaces, the whole process for both sides of finding and screening each other can be done securely, online. The payment processing has been hugely simplified via collecting marketplaces.

But what are the differences between these twinned markets, and what has made them so attractive to both individuals and consumers to result in such high growth?

1. The gig economy consists of individuals offering their time in the form of services, generally on a freelance or part-time basis. These services include: ride-sharing; professional; design; consulting; and delivery. Millions of people around the world are now participating in the gig economy, either through choice or by force of circumstance. It enables them to offer their spare time and to work flexibly around other work or family commitments to earn additional income in a potentially global market. Increasingly, they may offer their service to multiple customers and on many platforms simultaneously. In return, customers get to source extra labour, often specialised and from around the world, at short notice without incurring hiring or agency costs.
2. The sharing economy involves individuals or groups, renting out assets they own to customers who need them. These assets include: homes; parking; car clubs; crowdfunding; and peer-to-peer lending. The sharing economy allows individuals to generate income from underused assets, which may enable them to fund initial purchase finance. For the customer, they can gain selective access to a much wider range of services. Crucially, there is no transfer of ownership of the assets.

A summary of the various sub-sectors of both economies is set out below.

In terms of make-up: accommodation accounts for 54 per cent; ride-sharing 18 per cent; household services 18 per cent; on-demand professional services 7 per cent; and collaborative finance 3 per cent.