Employment status – proposals for change

The Office of Tax Simplification has published (on 3 March 2015) a report “into simplifying the difficult issue of how to determine whether a worker is employed or self-employed for tax purposes”. In this analysis, our guest blogger David Kirk – author of Employment Status: The Tax Rules – welcomes the report as a serious analysis of the complex issues that arise in relation to this topic.

When I was invited to meet the Office of Tax Simplification to make my contribution to their employment status enquiry I expressed the view that they must be absolutely mad to touch the subject: the OTS deals in quick wins and this was a subject where there were categorically no quick wins. Indeed, rather the opposite, as tinkering about with it as the Government has been wont to do in recent years has generally produced knock-on effects which HMRC failed to predict but everybody else did. It gives me genuine pleasure then to say that their report on the employment status, published on March 3rd, is a real tour de force and ought to be read by everyone with an interest in it. There are, it is true, no quick wins here, but they do at least recognise that there cannot be. When it comes to sorting out the subject for the longer term, by contrast, there is plenty to mull over, both in terms of the problems as they are now, some potential solutions, and the problems that would be caused by those solutions. It is absolutely clear that only a very wide-ranging enquiry designed to examine all the purposes to which employment status tests are put has any chance of sorting everything out and leaving a lasting impression.

Foremost in all this is a recognition that both tax and employment rights must be looked at, as the straightforward employment status tests feature in both and affect a very large number of people. Indeed one of the things that had made the current situation look ridiculous was that the Department for Business, Innovation and Skills (‘BIS’) has been conducting an employment status enquiry at the same time as the OTS has, with outsiders seeing no apparent linkage between the two. This kind of unjoined-up government really must come to an end, and with any luck a report of this kind will ensure that it does.

An impressive amount of research has been done into the drivers behind employment status decisions, and one that particularly struck me was that the tax – or specifically employer’s NI – that could be avoided by either a judicious or a fraudulent decision to get people into self-employment was not at the top of the list. Apparently businesses are even more worried about giving away employment rights. It will certainly be good for BIS (and indeed other government departments) to know that their mania for employment rights not only causes businesses to want to get out of giving them altogether, but also by doing so leads to a reduced yield for the Exchequer. Likewise HMRC need to be firmly told that putting people on to PAYE without giving them the associated employment rights that normally comes with that is fundamentally unjust.

The report then goes on to explain ‘direct routes to improve the current situation’ and ‘indirect routes to take the heat out of the problem’. The former part is on the face of it a bit disappointing, with a focus on better HMRC administration (heard that one before?) and an improved employment status indicator tool (there is an interesting discourse on the one used in Australia which appears to be far more user-friendly than ours, but it is going to be very difficult to arrive at one that is not too rigid). There is also discussion of a statutory employment test which could take a number of forms: this one really ought to remain in the ‘too difficult’ box. In the author’s view the disappointment lies not in the OTS’s report, but in the implications of its analysis which suggest at the end of the day that there really is not much that can effectively be done here.

It is therefore to the final part that one must look for solutions, and bearing in mind the breadth and complexity of the subject they very sensibly do not recommend anything for any more than further study. But the agenda for further study is spot-on. There is a firm recognition – displayed several times – that the ‘elephant in the room’ (their phrase) is employer’s NI, and that any solution that does not address the requirement that employers pay it, but engagers of self-employed labour do not, is unlikely to be much of a solution. Abolishing it altogether is mentioned, which would be very radical, although it is not something that the OTS can pick up and run with as significant sums of money would need replacing from some other form of tax. Also mentioned is a mechanism for putting certain company directors on to classes 2 and 4: this idea could be developed further I suspect. Additionally discussed, although not recommended, is an inbetween status for a freelancer company which would have a sole director and a minimum salary level. However pride of place is given to a system where deductions would be made in a similar manner to the Construction Industry Scheme, so that some payments on account of tax are made and engagers can carry out their responsibilities without being frightened of the consequences of having got their status decisions wrong. The report indicates that this would command a surprising amount of support from business, which one would have thought would resent the bureaucracy involved.

All in all this is a most welcome and timely report, and it is much to be hoped that the Chancellor will pick it up and run with it on budget day.

David Kirk, MA, FCA, CTA is director of David Kirk & Co., a niche tax consultancy specialising in payroll taxes and employment status, with particular reference to intermediary staffing companies (employment agencies and umbrellas).

On March 5, 2015, posted in: Articles, Company Tax, IR 35 by