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Wind of Change Must Now Blow

Employment Status Consultation Launched

Last year the Taylor Report – ‘Review of Modern Working Practices’, suggested a number of improvements to the employment status framework:

  • Government should replace its minimalistic approach to legislation with a clearer outline of tests for employment status, setting out the key principles in primary legislation, and using secondary legislation and guidance to provide more detail.
  • The current three-tier approach to employment status, i.e. employee, worker or self-employed, should be retained but those that are eligible for worker rights but not employees should be re-categorised as ‘dependent contractors’.
  • A new ‘dependent contractor’ test should place greater emphasis on control and less emphasis on personal service.
  • Renewed effort should be made to align the employment status framework with the tax status framework to ensure that the differences between the two systems are reduced to an absolute minimum.

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.

Current employment status regime

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.

Current status tests in legislation

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:

  1. Mutuality of obligation (MOO)
  2. Personal service
  3. Control

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.

A better status test?

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:

  • Length of engagement, where an engagement over a certain length of time would automatically be classed as employment. This approach is currently used in Greece and the Netherlands.
  • Percentage of an individual’s income that derives from one engager. Where someone received more than a certain proportion of their income from one engager, then the relationship would be considered as one of employment.
  • Location e.g. if an individual is required to carry out at least a certain percentage of the work on the premises of their client, then this would indicate an employment relationship. This is similar to the U.S approach where the individual has to prove that the work is performed outside the client’s place of business in order to demonstrate that contractor status applies.

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:

  1. Does not employ other workers at wages above DEM 630 per month (including family members);
  2. Depends on one employer for a long time;
  3. Is employed with tasks for which the employer usually employs dependent workers;
  4. Does not act as an entrepreneur;
  5. Is employed with the same tasks by the same employer for whom he or she previously worked 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.

ABC test for contractors in the USA

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:

  1. The contractor is free from the engager’s control in performing the services;
  2. The contractor performs work outside the usual course of the engager’s business or outside the engager’s place of business;
  3. The contractor operates an independently established business.

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.

Defining self-employment

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.

Deemed employees

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.

By Andy Vessey

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8 thoughts on “Wind of Change Must Now Blow”

  1. Phil the Pill

    All this nonsense because of the greed of some high profile personalities working for the BBC who were ill advised by some dodgy accountants. For the rest of us getting by as real hard working contractors paying ourselves properly and therefore incurring reasonable levels of employer / employee NI and PAYE tax plus CT we still have to get caught up in this needless churn. HMRC who currently are under resourced and offer a poor service to Joe Public need to be focusing on the debacle that they will have to manage post Brexit and not spending their time on trying to recoup a nebulous £1 billion they incorrectly forecast that us contractors are avoiding paying in tax.

    • Soprano

      A lot of stupid, unrealistic proposals, that barely even work in the jurisdictions they’re being taken from. All this results from the lack of a meter betweeni PAYE and NICs. The rest is window dressing. Time based restrictions are particularly arbitrary and stupid. The simplest test would be whether the role arises and is financed from a specific project, with an eventual deadline, that is separate to the business’s usual operations. Lack of MOO and of an intention to form an employment relation and therefore of any accruying benefits can also be added as additional filters. what they’re instead proposed is arbitrary unimaginative tripe.

  2. Rolo Tomasi

    I’m all in favour of clear objective measures. However, I also think the debate should focus on the consequences of being “caught” being more balanced and reasonable.

    Currently, being caught means you are due 95% of revenue as PAYE / Pension/NI, this :
    – makes a nonsense of the phrase “disguised employee” while RISKS are not recognised – don’t tell me a contractor taking on a 5 month stint of work with 1-2 weeks notice has the same risk as an employee (without even getting into prof. indemnities and liabilities – when did an employee ever sign up to potentially remediating work at their own cost)?

    – barely recognises costs of running the business (and certainly leaves little room for re-investment )

    – creates inflexibility in the co. finances, e.g. allowing for time without contracts

    – in IT at least, is out of whack when compared with consultancies / firms who place employees in very similar roles to many contractors, yet pay that employee nothing like that same proportion of their earned revenue…
    – removes the ability to claim travel exes despite the contractor being unable to plan to work near his/her employer

    Perhaps a setting of, say 45%, of revenues as PAYE (and recognising travel exes properly) would be more equitable and balanced (the other 55% – less costs and fair expenses – is still subject to corporate and dividend tax remember!).

  3. Soprano

    I mean I’ve worked on contracts where even after years, the client will still terminate with a “week’s” notice, which effectively translates to a a day at most. There is essentially no “Job security” when you – representing your firm – cease to perform to expectations. This is unlike anything in permanent employment.

    “Perhaps a setting of, say 45%, of revenues as PAYE (and recognising travel exes properly) would be more equitable and balanced (the other 55% – less costs and fair expenses – is still subject to corporate and dividend tax remember!).”

    Still arbitrary in the end. What they need to address is NI/PAYE imbalance. Income taxes are also too high. A person on £45k in this day and age is not a “High earner” in any sense of the word and a 40% marginal rate is ridiculous. But for this to take effect, they would need to revisit govt spending first.

    I like the project-based criterion I mentioned above. It’s about as relevant an objective criterion as you are going to get, insofar as establishing that the need for the resource is genuinely outwith the usual operating requirements of the firm. Time-based restrictions are arbitrary; some projects can last days, others years. And yet, being on them for years will STILL not make you a perm, because you are delivering on a set of objectives that sit outside the firm’s main operation and has a defined end point by its nature. It’s also easy to see whether a role is “paid for” out of a project-specific budget.

    • Soprano

      Also worth noting that there really is no MoO when the client is not obligated at any point to renew or even keep you on your current contract. All of this is brushed under the carpet, however, by a Treasury hungry for revenue and deaf to any counter-arguments that sidestep its narrow, erroneous POV.

      • Sharon

        This is so true. There is no mutuality of obligation. The company gets all the security and flexibility it wants while the contractor gets a few days notice to walk. The company saves on obligations such as pension contributions, sick pay, holiday pay, benefits such as child care support. The contractor gets none of these., to mention just a few. How can a contractor be considered in anyway an employee ???

  4. Andrew Harrison

    Many years ago I worked as an IT consultant for a large consulting firm and was placed by them on client sites. Subsequently I have done essentially the same job as a contractor with my own company.
    So let’s compare how the money flows:
    Client pays a daily rate (the big firm charges more)
    VAT gets charged and paid (similar except I use the flat rate scheme)
    I get paid a salary less income tax and NI (similar)
    HMRC gets income tax and NI (similar)
    I pay for hotels and travel (similar)
    I reclaim expenses (now only applies while working for the big firm)
    Pension payments get made (similar in principle, perhaps my companies payments are higher!)
    Large company pays dividends (perfectly acceptable)
    My company pays dividends (IR35 and tax avoiding)
    Large company board gets share options and makes capital gains (perfectly acceptable)
    I close my company and get a windfall profit (tread carefully it sounds like tax avoidance)
    It doesn’t look to me as if I am really defrauding HMRC – perhaps I am not typical.

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