UK government response to employment status consultation: tax aspects

The government has published its response to an earlier consultation carried out on employment status for employment and tax law purposes. The response, entitled "Employment status consultation: government response", concludes that there is currently no clear consensus on the need to codify the law on employment status (or if it were codified, what form it would take). In addition, the government has decided not to take forward proposals to align the meaning of employment status for tax and employment law purposes at this stage.

Background

In 2017, an independent review of modern working practices was published by Matthew Taylor. The review, commissioned in 2016 by Theresa May to consider how employment practices needed to change in order to keep pace with modern business models, "Good Work: The Taylor Review of Modern Working Practices", included a number of recommendations, including the recommendation that the definitions of employment status for tax law and employment law should be aligned. For more details of the Taylor Review, see our article.

In response to the Taylor Review, the government published the Good Work Plan and carried out a consultation on employment status, which sought the views of stakeholders on a number of proposals including the possibility of codifying the law on employment status and aligning the tax and employment law rules. The consultation sought to explore how wider employment status reform, including recommendations from the Taylor Review, could work, both in legal terms and in relation to the realities of the modern labour market, as well as seeking to understand the potential impacts and implications of those proposals. It also considered whether there are alternative approaches that could better achieve the aims of providing individuals and businesses with greater clarity and certainty. For both the employment rights and tax frameworks, the consultation considered the legislative tests that define the boundaries between the different statuses.

Government response: codification

As a result of the responses received, and the lack of any clear consensus in those responses, the government has decided against codifying the law on employment status at this stage. Whilst the government recognises that the boundaries between the different statuses can be unclear for

some individuals and employers, the benefits of creating a new framework for employment status are currently outweighed by the risk associated with legislative reform. Whilst such reform could help bring clarity in the long term, it might create cost and uncertainty for businesses in the short term, at a time where they are focusing on recovering from the pandemic.

Questions also remain around legislating, including how a test could be drafted which doesn't unduly limit the ability of the courts to rule against

employers engineering employment relationships that circumvent the law. The system has evolved over many decades, adapting to the challenges placed before it and it continues to adapt given the new forms of employment relationships. The Uber Supreme Court judgment provided more clarity about the approach to take when determining an individual's Employment Status, including taking the legislation's intention of protecting vulnerable workers as the starting point, as opposed to the written contract. It is appropriate to allow for the impact of such rulings to flow through to marketplace practices before considering any further interventions.

In the meantime, the government has published employment status guidance for employment rights, alongside the response document. The intention is for this guidance to make it easier for individuals to work out their own status whilst ensuring that the employment status system remains flexible and continues to adapt to modern working practices.

Government response: tax

This consultation sought views on whether there should be alignment between the employment tests used for tax and employment rights, how this might be achieved and what consequences this could have. The response document noted that most respondents favoured alignment of the

employment status test for employment rights and tax. It was thought that removing differences between the regimes would improve simplicity and help individuals have clarity of their status.

However, there were significant differences in view about what 'alignment' would mean for these purposes, with respondents considering alignment (a) at the self-employed boundary, so that those who are workers and employees for rights would all be employees for tax, (b) removing the middle 'worker' category for employment rights and then aligning with the two-tier employment status tax system and (c) employment status for tax purposes aligning with employment rights and introducing an intermediate tier of "worker".

Despite the overall consensus for alignment, the majority of trade unions and business representative groups did not support alignment, considering that there would be wider impacts and unintended consequences. Some respondents remarked that they are two distinct systems for two distinct purposes which do not naturally sit together.

The government response recognises that whilst the employment status rules for rights and tax serve different purposes, there could be some benefits to greater alignment between the two systems. However, there is also acknowledgment that proposals for alignment would be complex and would need to be considered carefully. Noting the lack of consensus around alignment, the ongoing economic recovery from the pandemic, and the wider economic context, the government has, therefore, decided that now is not the right time to bring forward proposals for alignment

between the two sets of rules. However, the government does indicate that it intends to work closely with stakeholders to explore longer-term options to improve the employment status system for tax to ensure it is as clear as possible and usable for all parties.

Finally, the consultation asked the fundamental question whether tax liabilities still depend on being an employee at all or should the boundary be based on something other than when an individual is an employee? The response notes that this question met with limited engagement and those who did tended to suggest that reform to tax rates was needed. However, as the response notes, reform to tax rates was not within the scope of the consultation. As such, this is not an area the government has indicated that it will pursue.