Not Quite IR35 But…

Office of Tax Simplification seek opinion about employment status

Back in July of this year, as part of its ongoing remit to create a simpler and fairer tax system the Office of Tax Simplification (OTS) were tasked with carrying out a review of employment status.

According to the OTS, the boundary between employment and self-employment no longer reflects modern working patterns, particularly in recent years. In particular, the increased numbers of those favouring the freelancing business model has caused some to suggest this is a ‘third way’ between employment and self-employment.

What’s behind the project?

In September, the first meeting of the Employment Status Consultative Committee meeting was held at which was discussed the scope of the project. Some Committee members felt there had been a trend over the past 15 years of large employers laying off some of their staff and re-engaging them as more flexible contractors.

Tax driven artificial structures to disguise true employment status are a problem in some sectors, such as construction, IT and the media.

The Committee felt that the employment/self-employment boundary was not well understood by the majority of those affected by it. The complexity has encouraged people to seek professional advice and spawned an industry that serves to advise people how to place themselves on one side of the boundary or the other. Harmonisation of the tax and NIC rules would go a long way towards resolving this problem.

Recent trends in employment law have caused the courts to recognise three types of employment status; employment, self-employment and ‘workers’. Tax law however only recognises the first two and not the latter. This has led to anomalies, e.g. where HMRC deemed someone to be employed for tax purposes but despite the change in tax status they are not automatically entitled to statutory employment rights.

The number of factors to consider in an employment status issue gave rise to inconsistency in treatment by HMRC, if different amounts of significance are applied to the different factors. The courts have also found the test difficult to apply and seemed to come to different decisions on the same or similar facts. The test should not be a one-off, as a worker’s status could change over time.

HMRC have agreed a particular status for some groups of workers, whether by guidance or enshrined in legislation. It was recommended that the OTS review should look at these special cases, although it was probably unrealistic to expect a comprehensive list of occupations with an assigned tax status for each.

Your voice counts

The OTS is now gathering evidence and wants to hear from contractors and others as to where the complexities lie in determining where someone is employed and self-employed. In helping those wishing to contribute, focus on the issues to hand, the OTS has produced the following guideline questions:

1. What industry/trade are you from, and if representing a group, how many members do you represent?
2. How have working patterns/arrangements changed over the last few decades?
3. What are the uncertainties, if any, around employment status questions in the tax system?
4. How does the tax system manage these problems?
5. What interactions have you had with HMRC in this area?
6. What are your views on a possible statutory employment test?
7. International experience/comparisons.
8. In an ideal world, where would you like this issue to be, in say 5 years’ time?

There are more sub-questions to the above which can be found by visiting www.gov.uk.

The OTS would like to hear from all interested parties by 31st December, with a view to publishing its report by the end of February 2015, in time for Budget 2015.

Although the OTS will not be considering IR35 there are clear and obvious parallels and any recommendations made as a result of this review may well have an impact on IR35.