In a number of my recent Blogs the question of self-employed status has been a recurring theme, so when the latest official review of employment status was published a few days ago, I immediately grabbed a copy to see if there was anything new or just dozens of pages of hyperbole as usual. To my amazement, I actually found some genuinely innovative suggestions that pleasantly surprised me.
The fuzzy boundary between the employee and the self-employed worker has been causing enormous problems for employers in recent years. They constantly have to decide how to treat each person for tax, national insurance, employment law and now pensions, with the advent of auto-enrolment.
In practice the employer’s problem is multi-faceted as the answer for income tax won’t necessary also fit the criteria for all other regulations and employment rights. The result is a confusing mess. The worker can end-up with the worst of all worlds, perhaps taxed under PAYE but with no employment rights; or taxed as self-employed with no pension rights.
Accountants have long been asking the Office of Tax Simplification (OTS) to solve this problem since the OTS was formed back in 2010. At last, and possibly as its last hurrah, the OTS has produced not just a review but a full-blown Employment Status Report.
In the forward of that report John Whiting, tax director of the OTS, acknowledges that seeking one solution to the employment status conundrum is the tax equivalent of the philosopher’s stone. There is no one answer that will transmute all the factors of the problem into shining clarity.
However, the OTS has made over 20 recommendations as short and longer term goals, but unlike in previous OTS reviews there are no “quick wins”. Some of the suggested solutions would require hard choices to be made, and the change from the current position to the simpler future envisaged will involve a long and difficult journey.
Conflict of Interests
Top of the list of recommendations is a joint review of employment status issues to be conducted between four government departments: HMRC, HM Treasury, DWP, and The Department for Business, Innovation & Skills (BIS). The implication is that lasting solutions can’t be achieved unless an agreed code of principles on employment status is established jointly by all these departments, which is a big ask.
Another cross-department task is to bring together all the government guidance on employment status into one employment status portal (presumably on GOV.UK). The OTS says this portal should cover both tax and employment rights. In my view this is an excellent suggestion; as by bringing together the tax, NI, pension and employment law rules, the holes and contradictions in the law should be highlighted.
The OTS recommends that the idea of a statutory employment test should be taken further. However, to satisfy the majority who contributed views to the OTS on this issue, any such statutory test should apply to both tax and employment rights. This is going to be very difficult to achieve, as is would require cooperation and agreement between the separate government departments that write employment law and tax law.
The OTS is strongly in favour of integrating income tax and national insurance in the longer term. This recommendation has been made in earlier OTS reports and has been rejected or ignored by government, so it will be surprising if it is not ignored again. The big sticking point is employers’ NIC, which is a huge earner for the Treasury. I believe that once income tax and employees NI are combined the employers’ NIC will be exposed as the pure tax on employment which in reality, it is.
The OTS suggests that the way forward is more transparency about employers NIC. It commented: “if more people realise how much employers NIC costs businesses and the amount it raises, there be widespread support for looking afresh at how to raise the money involved”.
- Greater guidance on the documentation and actions a business should take when engaging a self-employed individual;
- An employment status helpline for those with a genuine difficulty to talk to an expert quickly and get a ruling;
- Improved guidance on employment status including real life examples showing how employment status case law applies to them; and
- An expanded employment status indicator tool (ESI) that incorporates strands to cater for different industry sectors.
- Making tax deductions at source from payments to the self-employed;
- A de-minimis level of payments to an individual by a business which would definitely not create an employment; and
- Safe harbour to provide certainty for businesses once an employment status ruling had been achieved.
So what happens next?
This OTS report intended to set the agenda for long term simplification of the tax system in this area. The government was expected to respond at the Budget on 18th March, but the only comment that Mr Osborne made in his speech, was a vague promise to look at these suggestions during the next Parliament. In other words, once again kicking the issue into the long grass!
Being a realist, I know that nothing was going to change until a new government takes power in May 2015, but you do have an opportunity to influence their thinking if enough of you send feedback on the suggestions to the OTS: [email protected].
I sincerely hope that the OTS will be allowed to continue its excellent work under the new government after the General Election, but that is not at all certain.