Employment status consultation: tax aspects

The Government is consulting on the boundaries between various types of employment status following the Taylor Review of Modern Working Practices. As part of that consultation, the Government is seeking responses to the way in which the tax system inter-relates with different types of employment status and whether changes should be made to the tax system in that context: Employment Status Consultation (February 2018).

The consultation is an early stage one and steers clear of suggesting any fundamental changes to the way employees, workers and the self-employed are taxed, seeking at this stage to question whether greater alignment between tax status and employment rights status could be introduced.

Background

The Taylor Review of Modern Working Practices published in July 2017 was an independent review considering the implications of new forms of work on worker rights and responsibilities, as well as on employer freedoms and obligations, and on the challenges facing the UK labour market generally (see “The Taylor Review and the tax system”). Whilst changes to the tax system dealing with work were outside the remit of the Taylor Review, nevertheless the Review noted that the issue of the impact of the tax system was raised many times in the review process. As such, the Review did not shy away from these issues, which are of wide relevance for businesses and individuals. On this subject, the Review unsurprisingly concluded that the tax system gives rise to “perverse” incentives for self-employment over employment and that the Government should seek to examine ways in which the system might address the disparity between the level of effective tax applied to employed and self-employed labour.

Employment Status Consultation

The Employment Status Consultation, published in February 2018, is a joint consultation document issued by HM Treasury, HMRC and the Department for Business, Energy & Industrial Strategy. The main purpose of the consultation is to inform changes to increase the clarity for workers and employers as to the employment status of individuals, whether employees, workers or self-employed. In addition, the consultation is also considering the level of rights and protections provided by each different type of status. As such, tax is again not the focus of the consultation but, as the consultation document recognises, the tests and boundaries for tax purposes are different to those for determining workers’ rights and that should also form part of the consultation. In particular, ambiguities in the rules can be used by “unscrupulous employers” to justify “miscategorising” their employees or workers as self-employed for their own financial gain (eg paying less NICs).

In particular, Chapter 10 of the Consultation document considers the question of greater alignment between the tests for employment status for tax purposes and for the purposes of determining employment rights. For tax purposes, there are only employees and self-employed, the status of a worker has no significance. This can be problematic and confusing and views have been expressed that the definitions should be aligned in some way. The consultation document takes no particular view on this issue but does raise the question whether the definitions should be aligned and if so what consequences would follow. As the document notes, “the impacts of this proposal would need to be carefully considered.

In addition, Chapter 10 raises the question of the treatment of “deemed employees” eg persons taxed as employees under the IR35 rules and certain salaried members of limited liability partnerships. The question here is whether such persons, being taxed as employees, should also receive the same benefits as employees.

More generally, Chapter 6 of the consultation document asks whether someone’s tax liabilities should, in fact, depend on their employment status at all or whether there are other tests that should determine which of the two current tax regimes should apply. The document recognises that any change to the way in which tax liabilities are determined and in particular moving away from a test based on whether a person is an employee “would have very wide reaching implications for the tax system”. Accordingly, whilst the document raises this issue for discussion, the clear message is that such a change is unlikely to be progressed at this stage given the “significant challenges that this approach would pose”. However, the document does reconfirm that there are no plans to make any changes to Class 4 NICs.

Comment

From a tax perspective, the consultation is relatively uncontroversial. It steers clear of suggesting fundamental changes. So while the Government acknowledges that some commentators have suggested there should be no boundaries between employment and self-employment at all for tax, that proposition is not considered in the consultation. Moving from the current system to one that was in principle fairer and less distortive would not be an easy challenge for any Government. The losers will always shout loudest and any changes (even small ones) in this area will be politically charged, as the Chancellor found to his cost. It would take strong political will - and quite possibly cross-party support - to introduce any really fundamental changes. An alignment of the definitions between employment and tax is sufficiently challenging for now.

The consultation is open for responses until 01 June 2018, which should be sent to EmpStatusBEIS-HMT-HMRC@beis.gov.uk