26 July 2017
The Government’s review of modern working practices, led by Matthew Taylor, was published earlier this month. One of the main recommendations was to re-designate ‘workers’ as ‘dependent contractors’.
From a tax perspective, a fundamental problem continues to exist -in employment law, there are three categories within the national workforce, namely: employees, workers, and the self-employed. Whereas, for tax purposes, there are two categories: employees and the self-employed. The report, ‘Good work: the Taylor review of modern working practices’, does not tackle this difference directly, but looks at current working practices and suggests ways in which more fairness can be achieved.
There are two main economic areas in which fairness matters: the rights and benefits available to the workforce, and the amount of tax that is paid by each individual in the workforce, including, of course, National Insurance. Let’s kick around some of the tax issues…
Currently the tests to differentiate between employment and self-employment for tax purposes are based on case law from the spheres of both employment law and tax law. This has given rise to three main indicators of employment:
- The requirement for personal service;
- Mutuality of obligation (MOO); and
To avoid a worker being treated as an employee, it has been common practice to insert into a contract a right for the worker to use a substitute, meaning that the worker is not required to give personal service and therefore removing one of the indicators of employment. Recent legislation and consultations from HMRC have sought to play down the role of personal service in the assessment of employment status and the Taylor report continues this trend. With MOO being a somewhat nebulous concept and certainly not as prominent in recent case law as the other two measures, increasing reliance is being placed on control as a deciding factor.
The Government/HMRC have favoured the phrase ‘supervision, direction or control’ (SDC) recently, but Taylor sticks with just ‘control’. Proposals in HMRC consultations have tried to extend the definition of each of the elements of SDC so that there’s an almost impenetrable etymological thicket to get through before self-employment can be demonstrated. It is to be hoped that, if the Taylor proposals are implemented, a more straightforward and understandable definition of control will be included.
However, more clearly defining the status of workers does not address one of the fundamental issues that underlies the status debate and that’s the differences between the amounts of tax paid by employees and the self-employed. Add to that the timing of tax payments and it can be seen why there are financial incentives for both engagers and workers to err on the side of self-employment. If these differences are lessened in the short term and ultimately eliminated, then getting agreement as to the status of workers will be easier in future.
Of course, if more taxes are paid, then there will be the expectation that more rights and benefits will need to be made available to even-up the equation. This may come at an extra cost to engagers, both in terms of money, but also with regard to workforce flexibility. There’s no doubt that balancing these issues is a difficult task.
The first opportunity to gauge where the Government wants to go with the Taylor proposals, at least from a tax viewpoint, may be the Autumn Budget. There may be political considerations, but if ‘false self-employment’ can be placed alongside tax avoidance in the parliamentary rogues’ gallery, it’s likely that all-party support would be available for this type of move to greater fairness in the tax system. Perhaps the Chancellor may want to start the spin cycle at the party conference in the autumn to see how the idea washes with party faithful, given the National Insurance U-turn after the last Budget.
It’s certain that there needs to be clarification of the different categories of workers, the rights of these categories and the tax that’s due from each category. There will be more changes arising from the Taylor report and we will be keeping up to date with developments. If you are concerned about how any of the Taylor proposals may impact you, please contact me or your local UHY tax expert.