In its response to the recently closed HMRC consultation on simplifying employment status, the Chartered Institute of Taxation (CIOT) have rejected the suggestion that enshrining existing status law in legislation might improve the current system and have also called for an improved CEST tool.
Employment status is central to our tax system as it determines the taxes a worker and the engager have to pay. Correctly identifying the status of a worker however is not straightforward. On this basis therefore the CIOT, like many of us, deem it right that the government reviews how status is determined, the interaction with employment rights and whether there is scope for improvement to the present approach.
The institute’s response focuses on the income tax and NIC aspects of the consultation but they have encouraged the government to open up a broader review of how labour should be taxed in the 21st century and set out a realistic timetable to implement changes that are found to be necessary.
For the majority of workers their status isn’t an issue as they are clearly an employee or self-employed. There is however a large and increasing number of people, in particular those working within the ‘gig’ economy, where their status is far from clear cut.
Should status tests be embodied in legislation?
Whilst the CIOT wish to see a definitive way to determine employment status for tax, they do not believe codifying the current tests, borne out of case law, is the solution. This is because it is necessary to ‘paint a picture’ taking into account a number of different factors in relation to the positions of the individual and the engager and how they work together.
The consultation asked respondents to share their experiences of other tests, such as the Statutory Residence Test (SRT). SRT has the advantage of providing certainty and that it is applied at the end of the tax year to the factual events of that past year. It is, however, complicated and HMRC’s guidance runs to more than 100 pages. Although complex, the key benefit of the SRT is that more of its elements are objective and less subjective, so it is easier to determine whether someone is UK resident or not. This makes the SRT easier to enforce.
The institute would still welcome a statutory employment status test that could provide individuals and businesses with certainty as to a worker’s status at the start of a contract. Here, lessons could be drawn from the SRT. Before SRT legislation came into being around 50 examples were produced for parties to consider and decided on two questions:
Something similar could be done for status, whereby say 50 scenarios were produced and two questions asked:
At the very least this would identify situations where most disagreement on status currently arises and whether there is consensus on what the proper result should be.
Any new test would need to cope with a multitude of different circumstances which could lead to complexity rather than simplicity. On the other hand, a simple test could encourage businesses to adapt their arrangements so as to fall on the right side of the fence.
Regardless of whether legislative change is considered to be the best way to provide greater clarity on employment status, the CIOT think that better guidance is needed to help individuals and businesses determine a workers’ status.
An online tool would be helpful in determining status for tax but this has to be reliable and accurate and take into account all relevant factors including mutuality of obligation which is ignored by HMRC’s CEST tool. This could be extended to reference the employment law position but the parties would not be bound by the result whereas HMRC would. Where HMRC’s view evolves in terms of its judgment as to whether someone is employed or self-employed, then this should not be applied retrospectively to engagements that commenced prior to the change of view.
The CIOT believes that distinguishing the tax treatment of those who are employed and self-employed is increasingly outdated, particularly because of the distorting effect of employer’s NIC. If the boundary between employment and self-employment was lessened or removed, then tax and NIC issues around status would fall away. Furthermore, the nature of work in the ‘gig’ economy is also significantly blurring the differences between these two categories.
If the current differences in the way these two groups are taxed remains unchanged, then there is no scope for basing the boundary on anything other than whether or not the worker is an employee.
Retaining the concept of a ‘limb’ worker, whether or not redefined as a ‘dependent’ contractor, requires their tax position to be clarified. The government needs to be clear as to who falls into this category and what the point is in distinguishing them for employment rights purposes. Are they, for example, employees with fewer/different employment rights (dependent contractors) or self-employed with no/some employment rights (independent contractors), or a bit of both?
As part of a future public debate as to how labour should be taxed, the CIOT recommends that the government should consider redesigning employer’s NIC to address what costs it should apply to and how.
In principle, the institute considers alignment of definitions of employee and self-employed for employment rights and tax is a good idea. Businesses and individuals would certainly welcome one set of rules for the sake of simplicity.
Significant differences that currently exist between the two categories of worker, if not addressed, will continue to drive behaviour and cause business to adapt their business models accordingly.
Labour relations and employment law issues identified in the consultation should be resolved first, starting with agreeing the definitions for employment law purposes. This should cover the meaning of employment, self-employment and ‘limb’ worker (if retained). Once this has been established, it should then be decided what employment rights and state benefits are to be ascribed to each status. Finally, the tax treatment should then attach to the relevant status as defined for employment law purposes, with minimal possible tax exceptions.
Referring to IR35, the CIOT were non-committal as to whether contractors caught by the legislation should be entitled to claim some employment rights, preferring to bat this off as a labour relations issue rather than a tax matter. They did however point out that one of the key reasons for the IR35 rules is to counter the potential avoidance of employer’s NIC which is another illustration of why the government should take a closer look at employer’s NIC.