The promised consultation on employment status was published on 7 February 2018. While we welcome the fact that HM Treasury, HMRC and the Department for Business, Energy and Industrial Strategy are jointly investigating the issue, it is immediately clear that this is just another step in a long process of reform.
Alongside three employment rights consultations published in response to the Taylor review of modern working practices, the status consultation is seeking to identify how the current three-tier system (self-employment, ‘worker’ status and full employment) can be clarified for all. The focus is on how each tier is defined and “where the lines between them are drawn”: the consultation does not address possible ways to level the tax and NIC playing field across the three tiers (for example it reiterates that the Government has no plans to change self-employed Class 4 NIC).
However, the consultation does consider the issue in the round, addressing employment rights and tax issues together. In fact, the early chapters give a thorough and helpful analysis of the current legislative positions for both employment law and tax and NIC purposes and accurately identify the inconsistencies that arise. However, it is somewhat surprising that it does not mention the current off-payroll working rules that have to be applied by public authorities, or consider personal service companies in any detail.
Ideas for simplification
The consultation does not present formal proposals but does discuss different ways that employment status issues could be simplified. These include:
1. Simply issuing more guidance on the current rules
2. Attempting to ‘codify’ (enshrine) all case law in primary legislation
3. Drafting new primary legislation incorporating the ‘main principles’ of case law
While the third route is likely to provide the greatest clarity in the end, it does mean that someone has to decide what the ‘main principles’ should be. However, the key question asked is whether the rules that are codified in any new law should apply for both tax, NIC and employment purposes, or there should be standalone rules as now.
Potential for a statutory employment status test
The consultation explores the potential for developing a formal test that could be applied in all contractual situations to establish the employment status of the individual. Although those who have used HMRC’s current Check Employment Status for Tax (“CEST”) tool may be wary of such a solution, the key point here is that by setting down the rules for the test in primary legislation it could be made more reliable, consistent and accurate.
Since 6 April 2013, the UK has applied a statutory residence test to establish the tax status of individuals spending time in the UK. While it can be complex in certain situations, it does achieve a hard and fast answer on which the individual and HMRC can rely.
The key, of course, will be to simplify the issues considered. Therefore, rather than focus on a long list of individual factors and trying to weight each one, a simpler test could be created by focussing on three main factors:
- Mutuality of obligation (between the parties)
- Personal Service
Of course, establishing each of these will rely on considering various facts and the consultation goes into significant detail on what facts could and should be included in this process, whilst also raising the question of whether the factors noted above are still relevant for the purposes of employment status.
Further simplification ideas
The most important suggestion comes right at the end of the consultation document: the idea that there should be alignment between tax and employment rights. Different employment law and tax case law decisions have turned employment status into a minefield for businesses in recent years and BDO believes that greater clarity on employment status will only be achieved when all tax, NIC and employment law rules are aligned.
Interestingly, the consultation also makes the point that language is important for clarity: for example, it points out that an employee will always be a worker, but a ‘worker’ may not always have full employment rights. It suggests formally renaming ‘worker’ status as “dependent contractor” status so that all parties are clear on the relationship that they are creating.
Another suggestion is to create a positive definition of self-employment. Currently, this is a rather nebulous area of law – you effectively have to prove that you are not an employee to establish that you are self-employed. However, the dividing line between ‘worker’ status and self-employment is often hard to establish.
The consultation is a credible effort to tackle a knotty problem: the fact that it asks 64 questions makes clear that this problem will not be resolved in a hurry. However, in the short-term, it will be interesting to see if the responses to the consultation have any impact on the Government’s deliberations on extending the off-payroll worker rules for public authorities to all employers. We may hear more on this before Budget 2018.
The consultation closes on 1 June 2018 – read the Employment Status Consultation.
For help and advice on all employment status issues please contact Nick Duffin.
Employer Essentials index