Research from the TUC says the increase in low-paid self-employment, including so-called ‘gig’ economy jobs such as food delivery and cab hailing services, accounts for £2.1bn of the tax shortfall, and calculates the surge in zero-hours working has left an additional £1.9bn hole.

This view is echoed by the RSA chief executive heading a government inquiry into new ways of working who has warned businesses may be exploiting the employment rules to reduce tax bills.

The TUC report uses tax and benefit modelling to show the impact of the growth in ‘insecure’ work, that is non-permanent flexible employment, since 2006. It says the decline in the tax take is because low-paid self-employed workers and those on zero-hours contracts earn significantly less than regular employees and pay less tax and national insurance contributions (NICs), which also makes them more likely to need to rely on in-work benefits such as tax credits and housing benefit.

In addition, even when the self-employed do earn as much as regular employees, the tax is structured so that they pay less.

Research from the Institute for Fiscal Studies published last week showed that a permanently employed person pays an effective rate of tax of 31% on their income, but this falls to 22% for self-employed people, partly because of lower levels of NICs.

The TUC estimates that insecure working has grown by more than a quarter over the past five years and now accounts for 1 in 10 (3.1m) UK workers. The number of self-employed workers who are low paid has increased by more than a fifth (21%) over the past decade, it claims.

Frances O’Grady, TUC general secretary, said: ‘The huge rise in insecure work isn’t just bad for workers. It’s punching a massive hole in the public finances too.’

Taylor review into employment practices

Last November, the government announced a review into modern employment, led by Matthew Taylor, chief executive of the RSA. He is visiting the Google campus in London later today, in the first of 10 planned visits to sites across the UK which will combine meeting local people and organisations in the morning and taking evidence in the afternoon.

Ahead of the visit, Taylor said: ‘There is no question - and Philip Hammond [Chancellor] said this in the Autumn Statement - that when self-employment rose that reduces the tax take to the Exchequer.

‘There are reasons why that might be a good thing in terms of how those people are working, but it is clear to a certain extent what is actually going on is, people are creating forms of work for themselves, or businesses are creating forms of work, to try to avoid tax.

‘I think what should drive businesses is efficiency, productivity, innovation - not trying to evade tax. So, if we can make the system one where those incentives are less strong, then that would be an improvement.’

Separately, the RSA and Crunch have published a report calling for the government to adopt a more interventionist approach to self employment, addressing not just issues of taxation and regulation but also pensions, welfare, worker rights and late payments.

The recommendations include equalising the  treatment of workers  for NICs so that the self employed pay the equivalent or a similar rate to employees; changes to Universal Credit rules on a minimum income floor (MIF); assisted pension enrolment; and creating a permanent ‘what works’ hub for business support.

The report wants the government to consider extending the use of cash accounting to the smallest of companies, and to establish a paternity allowance and an adoption allowance for self-employed parents.

It also says there is a need to expand and raise awareness of the business coaching role of accountants, and calls on ICAEW and ACCA, along with other professional bodies, to look at how accountants might deepen their business advice and mentoring role, while ensuring that more of the self employed are aware of these opportunities.

The RSA’s Entrepreneurial Audit report also suggests that the government should consider whether a right to home working needs to be established, arguing that current tenancy rules prevent or constrain home-based workers. It also wants the government to look at extending new rules on late payments to medium-sized firms, and whether the self employed should have a right to a written contract, which spells out deliverables and a timetable for payment.

The TUC report is here 

The RSA Entrepreneurial Audit report is here