The victorious Uber claimants may regret it if HMRC become involved

The Uber app has become an essential part of life for many people, although I admit I’ve never used it. Out here in darkest Kent, there are no buses and getting a minicab to anywhere is horrendously expensive. That means a car is essential for almost everyone.

To recap, the Employment Tribunal last week found that two Uber drivers were ‘workers’ and so entitled to the national living wage and holiday pay. However, the Tribunal did not decide that the drivers were employed by Uber, largely because the claimants did not ask to be treated like this. Why not? Because, being employed means that you are subject to much higher taxes compared to if you are self-employed or a ‘worker’. Unfortunately for the drivers, HMRC might now get interested. So it may start demanding that Uber drivers are subject to higher taxes and the claimants may find they have cut off Uber’s nose to spite their own faces.

If you are employed, the tax on your salary is about 17% higher than it would be if you were self-employed. Most of the difference is made up of employers’ national insurance contributions of 13.8% of your gross salary. These are in addition to employees’ national insurance that, at 12%, is also 3% higher for employees than for the self-employed (inevitably, there are allowances and thresholds to complicate these bald figures).

What, you might ask, is the difference between employees’ and employers’ national insurance? In truth, it’s not very much. They are both taxes on our wages, together with income tax. All this tax, and our take-home pay, has to come out of the same bucket of money that our employers set aside to make sure we turn up to work each day. Tax experts will point to historical reasons for the split between employers’ and employees’ national insurance. They might also note that, in theory, businesses rather than employees pay the employers’ contribution. But since businesses treat this as just another cost of having staff, it is really a tax on employees, just like income tax.

The reasons for the disparity between the taxation of the employed and self-employed are manifold. Some of it is explained by the fact that employees have more rights than the self-employed, including holiday pay and protection from unfair dismissal. For that reason, some on the left see the entire gig economy as a giant tax dodge where individuals are duped into self-employment by unscrupulous businesses. Another issue is legislative inertia. It is very hard to iron out niggles in the tax system without someone complaining. But I think the main point of employers’ national insurance contributions is that they are a very effective stealth tax. They enable the Government to extract the equivalent of an additional 14% of income tax without us really noticing. The reason that the self-employed don’t have to pay this is that they write cheques to HMRC themselves and would definitely spot a 14% hike.

The fact that Uber does not have to pay employers’ national insurance means that its drivers get more cash or other benefits such as flexible working. Presumably most Uber drivers like this arrangement or they’d just up sticks, and go to work for a regular minicab firm. If HMRC do force Uber to pay extra tax, that’ll just mean less money for the drivers; higher prices for customers; and probably fewer Uber cabs at 2am on a Sunday morning.