VAT threshold - impacts on freelancer co-operation?

@harryrobbins I agree it doesn't seem right that self employed labour should be within the scope of VAT but a sole trader/self employed person is, in the eyes of the taxman, and companies house/FCA treated as a business providing a service to the client on behalf of the co-op. Unless they invoice directly in which case they are providing the service to the client. If a member invoices a co-op and has to keep accounts they are a contractor not an employee. The person may see themselves as a "worker" but the fact is they are a business. A consortium of self employed people is no different than a consortium of small businesses except in scale. Not my rules and I don't like them, just saying how it is.

I agree they are currently treated that way, but I believe a good response to the government's consultation would be to suggest a bold alternative.

While legally an LLP, for example, can be made up of natural people or other companies, it would be easy to distinguish in law between a person and a company.

I'm all for bold alternatives, but I'm not clear in this case what that might be?

My proposal is that the VAT threshold for worker co-ops should be equal to the number of natural members (people) multiplied by the current VAT threshold. The justification is that it's moving lots of sole traders into collective work and increasing productivity/economies of scale. The logical reason is that worker co-ops are not 'adding value' they are creating it.

Sorry - I've complicated matters. To me a freelancer co-op is a form of worker co-op where the contract is one of self employment, or zero-hours contracts. To me a consortium co-op made up of non-natural persons (e.g. one made of companies) is not relevant here, as there is no justification for consortia of companies being excluded from VAT.

My clearest example is probably of a self-employed plumber, carpenter, bricklayer and electrician who would like to start a worker co-op building contractor to renovate people's houses, but who are currently prevented by the VAT threshold.

Wikipedia descibes VAT as "based on the increase in value of a product or service at each stage of production or distribution" and since the labour is being created it does not have an increase in value. Bricklayers do not make their money by marking up bricks.

It should be noted that my imaginary building company would not get the 20% savings on their bricks, sand, paint, etc. but it's a tiny part of their business and they're basically reselling the materials at cost anyway.

If such a tax break were in place we would very quickly see a massive growth in fake worker co-ops. In terms of the bricklayer, my guess is that HMRC sees her as adding value to the brick by taking it from a relatively low value pile of bricks to a high value element of a building.

What would a fake worker co-op look like? If the articles said 'one member, one vote' then 'fake' worker co-ops would be very vulnerable to takeover by their workers. Bring it on, I say.

As a tech worker I don't actually have any bricks. It's hard to argue that I'm reselling electricity at a high price, or whatever.

Given the lack of clarity in English law about what a co-operative is, and the multitude of legal forms that can be used to create a worker co-op, I think the chances for obfuscation and creation of fake worker co-ops are pretty high. The co-operative movement already lacks teeth to defend it's hard won ethical credentials. Offering financial incentives creates a problem that we are not equipped to deal with. A fake worker co-op could easily look like an LLP, where the public-facing documentation is almost non-existent, and all the details of governance etc are hidden in the private partnership agreement.

On the spurious point about creating value somehow differing from adding value, well it's just that, spurious.

Fake worker co-operative? Easy to set up under at least four legal forms which don't bother at all about co-op principles. So set the fake co-op up with co-op rules but with me and my partner as the members (and a mate if the tax rules say there have to be three members).

It's been done before, although not with co-ops. A decade ago, the government was chucking money at social enterprises. But the grant regimes required there to be at least three members to get the grants. Lots of people set up 'social enterprises' which were basically themselves plus two people (usually a partner, a family member or a mate) to act as 'Directors'. Then applied for and got grants.

If three people work together on a business and run it democratically (and in keeping with other co-op principles), I think they're a worker co-op even if they are related to one another.

If the three people don't really work together and it's just a vehicle for their individual enterprises, then what would the tax advantage be of having a worker co-op as opposed to being three sole traders?

Also, I don't feel we should go down the "there shouldn't be any advantage to being a co-op as then everyone will start one" road.

I'll bow to your judgement on what's spurious ;)

Two of the people would never have been sole traders. But I've increased the VAT threshold for the business from £85k to £255k.

Good point :)

My night's thinking on this is: there are already lots of tax loopholes around people making their husbands partners in their businesses in order to share the tax allowance, etc. and they're quite difficult to enforce.

If you made the shared VAT threshold pro-rata (e.g. full time workers get a full VAT share) then you'd have to declare how many hours each person worked - you could even be required to keep rudimentary timesheets/receipts for days worked. That would make it much more difficult to scam as anyone would be vulnerable to charges of fraud if they declared themselves to be working when they were actually doing something else.

In other words, it would be a lot easier to close this loophole that others.

Also, all VAT should be abolished and replaced with progressive taxation, but that's another story.

Thank you all really useful. @nathanbrown Don't some VAT costs of co-operation still arise even when the clients pay the freelancers direct, if the combined revenues the co-op receives in membership fees/commissions in a year goes over the threshold?

A workable proposition that really guards against tax avoidance would be a tough nut to crack.

Yes, that would be the case. And if the freelancer members are invoiced by the co-op for services they would also be paying VAT which may be non-reclaimable, (unless they are individually over the threshold and registered).

In practice, marketing co-operatives rarely reach the £85k VAT threshold unless they are very large (in which case they should be paying VAT). I've just set up a marketing co-operative for 40 freelancers in Scotland. The co-operative's turnover will be around £20k. Growing to a scale where VAT would be an issue was so unimaginable, it was never even discussed as an issue.

Thanks Dave. That's a really useful insight into scale in relation to the threshold.

Dave, even if this is perhaps hypothetical considering the scale point, can I clarify that in your view, there isn't a good rationale for a marketing co-op with £85k> income being treated differently? Not even if all that income came from the freelancers who owned the co-op (fully mutual) and all surpluses/losses in the co-op were distributed back to the freelancers through prices/rebates (Mutual Trading Status)?

I'm not an accountant but here goes. As I understand it, VAT is tax on the value added on taxable goods and services. VAT applies to specific goods and services (which can be full rated, zero rated or exempt) no matter what sort of organisation delivers or buys them. There are no VAT exemptions applying to an entire class of business. There are a few VAT exemptions for specific activities by charities (for example building works) but again this is on a specific good or service. So I suspect that any attempt to exempt a class of businesses from VAT would mean a fundamental re-write of UK tax law. This may be a tricky ask.

I get that. What about a different (lower?) tax treatment for payments made by freelancer members to fully mutual co-ops? Sorry to keep asking, almost there I think...

For me a tax break for cooperatives worth campaigning around, rather than VAT, would be something akin to the Italian scenario where cooperatives contribute a percentage of their profits to a central fund, and in turn get a tax relief on their corporation tax. In Italy this provides ample funding for cooperative development, as contrasted to the UK where our co-op development professionals are few in number and not well paid.

Hi Harry,

I think the confusion is that often a workers co-op is controlled
by it's employees and obviously you aren't an employee if you are
self employed.

Consortia are often of self employed people.

cheers

Andy

Hi @andrewwoodcock - Outlandish has been a mix of all sorts of things over the years - partnership, worker co-op, freelancer co-op, etc.

Personally I feel that a co-op controlled by the workers is a workers' co-op, whether they're self employed (e.g. partners of an LLP) or employed (e.g. on PAYE). It doesn't make a material difference to the running of the co-op.

OK thank you everyone. I thought it best to try and pull all the main thrusts together into a google doc. If you are interested in shaping this further, please take a look and comment. The we can decide if there is any real appetite and rationale for putting a case forward to HMT, Labour, other parties and whoever might be able to help:

https://docs.google.com/document/d/1JG6fnReqCrPB70gaPCDw-77-Bv3n9cGOwKp4W7mzWvQ/edit?usp=sharing