With the consultation over employment status now closed, is it time to clear up this grey area and remove the differences in tax treatment for employees and the self-employed?
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This article was first published in the July/August 2018 UK edition of Accounting and Business magazine.
Earlier in the year, the government released its long-awaited response to Good Work: The Taylor review of modern working practices. The period of consultation closed on 1 June, so now there follows a further wait before the government reveals its final recommendations.
But in the meantime, the government is pressing ahead with a consultation to extend the new public sector IR35 rules to the private sector, even though the impact on the public sector of these new rules, which shift the onus onto employers to assess whether or not their ‘workers’ should be subject to IR35 and pay any subsequent tax, have not been fully analysed and understood. At the same time, tax tribunals are littered with cases and appeals seeking clarification of individuals’ employment status and tax liabilities.
At the heart of the issue is the intersection between employment law and the tax system. As the government’s consultation document spells out, employment status ‘is the foundation of employment protections in the UK... Employment status also affects the taxes an individual and their employer pay.’
Although the Taylor review’s terms of reference did not include tax, it concluded that it was not possible to separate tax from employment status.
Here, though, there is already a disparity. In employment law, there are three categories of employment status: employee, worker and self-employed. But for tax purposes, there are just two: employed and self-employed.
Ambiguity and abuse
The numbers involved are worth remembering: according to IPSE (the Association of Independent Professionals and the Self-employed) the 4.8 million people who are self-employed contributed £271bn to the UK economy in 2017. The government, like IPSE, is concerned that a significant proportion of this army of freelance workers might not be self-employed, but that ‘ambiguity can be used by unscrupulous employers to justify miscategorising their employees as self-employed for their financial gain’. In other words, the Treasury is concerned it is losing revenue through abuse of the tax system – hence the possible extension of the new IR35 rules placing the onus on the engager (or employer) rather than the worker (or employee) to collect tax.
Chas Roy-Chowdhury, ACCA’s head of taxation, says: ‘The biggest problem is the opaqueness, which in turn drives engagers of workers to treat people differently. Uncertainty is a huge challenge when you’re trying to make decisions about whether someone is employed or self-employed. The fact that HMRC tells you that this is a grey area really doesn’t help. As an employer, what would your next step be?’
One of the ideas mooted in the government’s consultation is a statutory employment status test, similar to the statutory residence test, to help clear up this grey area. The statutory residence test wasn’t popular to begin with, but it has provided certainty and clarity.
Contention and vexation
‘It is a real battleground, with a lot of activity in tribunals and appeals,’ says Gary Gardner, a dispute resolution partner at Blick Rothenburg. ‘It is an area of some contention, and where you have a lot of activity you have great uncertainty. There is a vexatious difference between employment and self-employment, both in terms of employment rights and tax law.’
However, Gardner is not convinced that a statutory test would work in practice. ‘A statutory test for employment tax and rights purposes could be too good to be true,’ he says. ‘I can’t see at the moment how you can get a test for employment status for tax purposes that would fit all of the different circumstances and fact patterns that these different tribunal cases throw up. Much depends on the weight of control, whether workers are obliged to do things in a certain way, turn up at a certain time at a certain place. They all carry different weight.’
Gardner also points out that the statutory residence test impacted very few people, whereas changes to employment tax could hit millions. And this goes to the heart of the problem: tax and employment law have not kept pace with the reality of today’s working world. ‘We need to stand back from the detail,’ says Gardner. ‘We are still a long way from moving forwards to a fundamental review of the modern labour market. For the time being, we have to accept that there is a distinction between employment rights and taxes.’
Philip Smith, journalist
CPD technical article
"Ambiguity can be used by unscrupulous employers to justify miscategorising their employees as self-employed for their financial gain"