Lets talk status

OTS to discuss their review of employment status with government

Earlier this year, the Office of Tax Simplification released a report on the complex problem of employment status.

The report sought to address the long-standing problem of status. On this occasion IR35 was not part of the OTS’s remit and their broad agenda was:

To test whether there really was a problem.
Why is it such a problem and what are the underlying causes and trends?
Develop and assess possible routes to improve the situation.

It was clear to the OTS that the tax system is stuck in an out-of-date mindset more appropriate to the 1950’s and 1960’s.

Ultimately the aim is to develop ideas that lead to simple rules that can be readily applied in practice and easy to enforce which led to the OTS making a number of recommendations.

The report encouraged interested parties to comment on the OTS’s conclusions and these have now been published in a short paper.

Office holders
The comments received by the OTS support their conclusion that there is a need to review the rules and guidance around office holders

Link with employment law
One trade body who acknowledged the confusion that exists over status, considered this uncertainty to be the primary risk facing many self-employed workers. It was thought scope for manipulation of the rules was a cause for concern of HMRC and the Treasury. They felt the issue can only be properly dealt with by adopting a joined up approach across tax and employment law, involving all relevant Government departments including HMRC, HM Treasury, the Department for Business, Innovation & Skills (BIS), the Department for Work and Pensions (DWP), the Pensions Regulator and the Home Office (for visa applications) to prevent escalation of the current problem where individuals fall within employment taxes yet have no entitlement to employment rights. This very situation was considered by another respondent to be fundamentally unjust.

Rather than structural changes, the respondent felt that a panel of advisers who specialise in employment status should work closely with those enforcing the rules, to help develop greater clarity and transparency around the rules. It was also considered that the lack of tax/NIC risk for end users resulted in some of them not considering the correct status of the worker, particularly for lower paid and vulnerable workers, when commencing a new engagement.

Employment Status Indicator (ESI) tool
An industry representative commented that updating and adapting the ESI tool seemed like a good idea, but thought it unlikely that it could be sufficiently accurate, transparent and reliable for the contractor taking the test on an ongoing basis. It was also thought that HMRC may be concerned that it would be manipulated in order to produce a preferred result. A self-employed trade group said their experience of using the ESI tool was not positive and it would need to be significantly changed to be of value to professionals and the self-employed.

Statutory employment test
One respondent was in favour of a court based approach, with guidance picking up on established employment law principles, rather than a targeted statutory test which could fail to achieve practical effect.

An industry representative commented that a simple short set of measurable tests may be the only workable solution but this could also prove to be draconian, dragging in too many contractors who are genuinely in business on their own account. It was considered the test would also need to replace IR35 and it was likely that enforcement would be very difficult.

Tax and NIC differences
An accountancy body called for serious consideration to be given to aligning the NIC rates between employees and the self-employed, given the numbers moving into self-employment. Additionally, the alignment of benefits would also allow for a safety net for future entrepreneurs, mitigating the risk of starting a business and encouraging a greater appetite for going it alone.

A representative body commented that because employment gives a greater tax and NIC yield than self-employment, HMRC are likely to become involved in what should be a decision between the contractor and their client and that their default argument will be for employment status.

One accountancy firm told the OTS that the use of PSC’s within the NHS was resulting in tax/NIC avoidance.

Deduction of tax at source
A tax consultancy firm suggested the concept of a construction industry type deduction of tax at source as a potential solution, although a separate response from an accountancy firm commented this proposal would have major implications and that clarification would be needed on who would be caught.

A third way
This involves the introduction of a new category of worker, a ‘third way’ between the employed and self-employed, acknowledging that some workers do not fit easily into either of the two traditional positions.

On the idea of a middle status, a representative body said they were looking to develop such a route themselves, and were planning to put forward a comprehensive proposal for discussion.

The range of comments received by the OTS reinforces the evidence they assembled in preparing the report, that there are problems around employment status and that further work is necessary on the routes set out to improve the position.

Discussions will now take place with the Government as to how best to take the review forward.

Whilst IR35 is not a subject of this review, naturally some of the ideas and concepts thrown up by the Employment Status Report will filter into the current discussion on IR35 and possibly adopted, adapted and applied.