Last year the Taylor Report – ‘Review of Modern Working Practices’, suggested a number of improvements to the employment status framework:
The current framework often fails to provide the clarity and certainty that individuals and businesses need, something that the majority of contractors will testify to. This means that time and energy is wasted in attempting to understand the rules and, as such, the Government wholeheartedly agree with the report’s conclusion.
The Government say that they have made no decisions about whether or how to reform employment status, or to aim for alignment between the test for tax and rights. As this is an important and complex issue, they acknowledge that careful consideration is needed and have recently launched a consultation document, simply titled ‘Employment Status Consultation’ (PDF)
Views are being sought on a range of options including whether codification of the current case law would result in greater clarity and certainty, or whether alternative approaches would better achieve this. The consultation also invites views on how the detail of the employment status tests may need to be updated to reflect modern working relationships, e.g the gig economy.
For tax, which this article will be confined, to the document considers the tests that define the boundary between those taxed as employees and self-employed. Whilst some have suggested that there should be no boundary for tax at all, this is not considered in consultation.
As the labour market has developed and evolved during this century, the application of employment status to new ways of working has become less clear and, for rights in particular, the boundary has blurred between a worker and someone who is self-employed.
Employment status is dependent on the interpretation and application of case law against the specific facts of each case, making it difficult for some individuals to predict their status.
HMRC enforcement of employment status can be costly and time consuming both for the department and the taxpayer, particularly if the matter ends up at either tribunal and/or court.
In considering the recommendation that the tests for employment status should be enshrined in primary legislation, the Government want to know if people think this the right approach and, if so, what the main principles would be, and whether it would achieve the intended aim.
Codification (arranging laws or rules according to a system) could be achieved in a number of ways, from simply lifting the case law and slotting it into primary legislation or only using selected points of the case law.
In determining whether a contract of service (employment) exists, there are three major persuasive factors that are considered:
The consultation however asks what these concepts mean in the modern labour market, are they relevant to determining employment rights and how they could be set out in legislation. It also asks if the tests of financial risk, integration, provision of equipment and intention of the parties should be included in legislation.
Primary legislation would set out the key principles whereas secondary legislation would add more ‘flesh to the bones’ and can be amended or adapted without an Act of Parliament, as government can change secondary legislation via Statutory Instruments.
There are two ways in which a test could be more precise:
A. More precise criteria, i.e. based around more objective criteria such as length of engagement; or
B. More precise structure, i.e. based around a clear order, hierarchy, or weighting of the criteria.
Types of criteria that are suggested by the consultation include:
In structuring a statutory test, the consultation document offers up some international examples of how this could be achieved, with one of those being the German social security test that was introduced in 1999. If an individual fulfils three out of five of the following conditions then they are classed as an employee:
A less complex test could be created by reducing the number of factors to consider. This approach would still be based on criteria that could be open to interpretation but the factors to consider would be narrowed down. For example, the Agency Legislation was amended several years ago to rely on the test of ‘supervision, direction or control’ in determining whether an agency worker should be taxed as an employee.
The ABC test is different to an ordinary employment status test, as it presumes that a contractor is an employee and requires that the company or contractor proves that certain conditions apply in order to be treated as a contractor. The tests are open to interpretation but limited to three main criteria:
Legislative change is not necessarily the only way to provide greater clarity and certainty over employment status. These aims could be achieved by helping individuals and businesses understand the current rules more easily. However, HMRC have been trying to do this unsuccessfully for some time now, and even abandoned its own Business Entity Test.
The only legislative definition that exists for self-employment is that for NIC purposes, which is unsatisfactory:
“a person who is gainfully employed…otherwise than in employed earner’s employment.”
For tax purposes, a person is self-employed if they are not an employee.
Given that the employed and self-employed are taxed differently, should the boundaries be based on something other than whether someone is an employee? This would represent a fundamental change but the Government have opened up the question to canvas views.
Some commentators have proposed that employment rights legislation should be amended so that those who are deemed to be employees for tax also receive some employment rights.
As IR35 decisions often hinge on the evidence of the end client, then introducing automatic employment rights for contractors caught by IR35, would help to sharpen their focus rather than making sweeping and general statements in the knowledge that they are untouchable. Surely then, it is only equitable that where a contractor’s fate rests on the end client’s word, then there should be some recourse available to the freelancer. The consultation therefore asks what level or rights are most appropriate?
Closing date for responses is 1st June 2018. We could be standing at the gateway of a much-needed overhaul of measuring employment status and, if this is the case, I would urge contractors to make their views known as you are at the coal face of this problem and therefore are well positioned to tell the Government what a fair system should look like.