There are, Adam Smith argued, and most economists agree, four determinants of a “good” tax.
First, it should be easy to understand and calculate. The person being taxed should know what they are being taxed on, and be able to work out with little difficulty what they owe. This is what Smith called “certainty”.
Second, it should be easy and cheap to pay and collect. That is one reason why PAYE taxes, for example, work so well: Employers do most of the work for the state, and the employee who is actually being taxed doesn’t really have to do anything at all except read how much he paid on his payslip. This is what Smith called “convenience”.
Third, the tax should be fair. That is to say, if it needs explaining, that a good tax should leave the person or entity being taxed with a decent income after the tax has been applied.
Finally, the tax should be effective: This means, simply, that a good tax should try not to discourage economic activity. An income tax on a low income for example that actually made the taxed person better off if they quit their job and went on the dole would be an ineffective tax.
I mention these four principles because of the situation that many Uber Drivers in the country now find themselves in, partly because of a strange tax regime, and at least partly, it seems, because of poor communication between Uber and those who drive for it.
The first thing to say about this story, if you know nothing about it, is that in Ireland, there is no VAT on taxi journeys. When you pay your fare to the taxi driver, there is no VAT added on that the taxi driver must collect, and pay on to revenue.
However, there is VAT on service provision. So, in the case, for example, of an Uber Driver who takes a €50 fare, that driver must pay €12.50 to Uber for the use of the app to generate the fare, leaving him with €37.50 for himself. However, since Uber have provided him with a service, that driver must also pay VAT on that service – in this case an additional €2.88. That money would be owing to the Revenue Commissioners.
In most cases, Irish people pay VAT at the point of sale. Technically, if you buy something in a shop that has VAT applied, you – not the shop – are the one paying the VAT. What the shop is doing is collecting the VAT and passing it on to the Government.
In the case of the Uber drivers, the company was not collecting the VAT. But that money, the revenue commissioners insist, is still payable to Government.
This was, Uber insists, perfectly legal. However, the document on its website setting out the position for drivers was only published last year. Some drivers have been engaged with Uber for far longer than that.
Given that the norm in Ireland is for the vendor of goods and services to collect VAT, a fair minded person might understand, I think, how it came to pass then that many Uber drivers were simply unaware that they owed a potentially significant sum – thousands in some cases – in VAT to the revenue commissioners. Indeed, up until last year, it appears the revenue commissioners themselves may have been unaware. However, last year the Irish Government transposed an EU regulation into Irish law which now requires Uber and other companies to share details of its contractors with Revenue. Revenue is therefore unaware of the position no longer.
The revenue, now that it is aware of the situation, is taking action: Uber Drivers who do not pay what they owe will not have their Public Service Licences renewed, and will be out of work. For a tax bill that, in at least some cases, they will have been entirely unaware that they owed.
This would seem to me to breach all four of Adam Smith’s principles of good taxation: That it has taken me fully eight paragraphs to explain the tax would suggest that it is not simple, and breaches the certainty principle. It is difficult to argue that this particular tax is fair, or easy to collect, being as it imposes a duty to register for VAT on thousands of small contractors, each of whom must pay a relatively small amount. If the tax ends up putting drivers off the road, it is certainly hard to argue that it is effective.
Obviously, Government cannot simply write off tax that is legitimately owed to it. However, it would strike this reporter at least that there is a clear case here for leniency and co-operation, rather than threatening the livelihoods of those who have only recently found out that they owe money. In these specific circumstances, and given that the overall amount of money is small, one might expect a sensible Government to work out generous payment plans with those who owe it money, and to withdraw the threat of putting them off the roads.
I reached out to James Lawless, Minister of State at the Department of Transport, to put these points to him. At the time of publication, I have received no response, but will update this piece should that change.