Changes on the horizon for employment status and PAYE


Written by: Mark Abbs

As you may be aware, there has been increased focus in the media recently on employment status.

This follows concerns that have been raised with the employment status of the delivery company Hermes’ drivers and other operators in the so-called ‘gig economy’, including Uber, who have been the subject of a recent tribunal ruling that stated that their self-employed drivers should be classified as workers. The ‘gig economy’ is characterised by short-term temporary contracts with workers who are classed as self-employed and have none of the rights and protections of employment, such as minimum/living wage, sick pay, holidays and pensions.

The ruling came as HM Revenue & Customs ("HMRC") announced the launch of a specialist unit to investigate companies who opt out of giving workers employment protection by using agency workers or classing them as self-employed.

In addition, the government commissioned an independent review of working practices, the Taylor Review, which was published recently. The Taylor Review proposed some significant changes to the way in which an individual’s employment status is determined. The proposals may not necessarily be enacted, however, the current political and economic environment suggests that significant change is highly likely and this is something that organisations should be considering now.

Taylor’s proposals follow an earlier report in 2015 by the Office of Tax Simplification ("OTS") on employment status. The OTS’s report clearly highlighted the central issue: "…the tax system is still in many ways stuck in an out-of-date mind-set: of categorising workers as either employees, firmly on the payroll, or self-employed. This made sense in the 1950s and 1960s but the huge growth in freelancing doesn’t fit readily into this traditional model". Taylor echoes this sentiment and also cites other reasons for change such as the perception that the tax system acts as an incentive for practices such as bogus claiming of self-employment.

So change is inevitable and it would be wise for organisations to think about the potential impact of any changes to their own workforce and business model. There is also likely to be a cost impact for many organisations (i.e. employment is normally more costly than self-employment), as well as the challenge of dealing with a new compliance regime for PAYE and National Insurance.

HMRC are expected to launch a consultation on the Taylor report later in 2017. We welcome change in this area as it is clear that the employment status rules and regulatory framework requires an update and more clarity. However, any future measures should not impede the flexibility of the labour market or stifle employment creation.

What is the current position?

There are many factors involved in deciding whether a worker is employed or self-employed. No precise definition of self-employment exists for either tax or National Insurance Contributions ("NIC") purposes. In many cases, deciding the correct relationship between the parties is straightforward but in some cases it is a complex and difficult decision.

To confuse matters even more, the rules for NIC specify the opposite treatment to the tax position for certain categories of worker. Examples include examiners, office cleaners and actors.

Incorrect classification can result in the employer or contractor being held accountable for any tax and/or NIC not deducted. This could include interest and penalties of up to 100% of the outstanding liabilities.

Whilst there are similarities, the tests for employment law (primarily determining workers’ rights and employers’ legal obligations) are different to the tests for employment status for tax purposes (primarily determining whether an employer is required to operate PAYE and NICs on a worker’s remuneration). This can lead to confusion and the perverse result that someone may be treated as employed under the law but treated as self-employed for tax purposes, or vice versa.

Currently, employment status for tax purposes (i.e. whether someone is employed or self-employed) is determined mostly by case law and associated HMRC guidance, including an employment status indicator.

Whose choice is it anyway?

Individuals cannot choose whether they are to be classed as self-employed or as an employee. The circumstances of their engagement will determine the status and unfortunately the burden of this decision initially lies with the employer or the contractor, and then for them to make the necessary tax deductions and/or NICs, as appropriate.

How is status determined?

The tests are numerous, subjective and can include the following factors:

  • control – who decides where the work is done;
  • mutuality of obligation – can the worker refuse the work
  • financial risk;
  • integration – is the individual part and parcel of the organisation;
  • substitution/delegation – is there a right to substitution
  • equipment – who provides equipment necessary to do the work; and
  • is it a contract of or for services?

None of the above criteria listed can, in isolation, be taken as determining employment status. It is the overall picture, after taking all of them into consideration, which will determine whether a worker is employed or self-employed.

What is HMRC’s approach?

Whilst their guidance on status should in theory produce a certain outcome (i.e. an individual is self-employed or employed), the reality is not that clear-cut. Part of the reason for this is that the tests themselves are subjective and different tests carry different weight depending on the circumstances.

In addition, the tests often do not reflect the reality of workers who may undertake brief stints of work for multiple companies, who operate in the ‘gig economy’ and are paid on a case-by-case basis or workers who receive their work via online platforms.

The current position can lead to an array of issues, including uncertainty, the risk of non-compliance for employers and those they engage to work for them, unexpected tax bills and time-consuming disputes.

As a result, HMRC will now routinely challenge the status of any workers classified as self-employed during the course of a compliance inspection.

What is Taylor recommending?

The Taylor Review makes a number of recommendations including:

  • There should be greater alignment between the employment law and tax definitions of status; providing greater clarity and consistency to both employers and workers.
  • New legislation should be introduced to determine an individual’s status (i.e. rather than a heavy reliance on case law). There should also be greater clarity; perhaps with the introduction of an online tool and more definitive tests than exist currently.
  • A new category of ‘dependent contractor’ should be introduced for tax purposes (mirroring the proposals for employment law) whereby the degree of control exercised by the engager will have more importance in determining status. This new status for tax purpose is partly to reflect the array of new working arrangements (i.e. such as Uber drivers) where individuals are not clearly either employed or self-employed.
  • NICs for the self-employed should be aligned with those of the employed, reducing the incentive for individuals to contrive bogus self-employment arrangements.

How we can help?

For all employers it is perhaps too early to start making any substantial changes to current arrangements. However, we would recommend that organisations:

  • review your current workforce (i.e. numbers of self-employed, contractual workers, full-time employed etc.);
  • review the status of any individuals who are not engaged as employees (or otherwise on the UK payroll, subject to PAYE and NICs); and
  • assess the potential cost and business risk associated with any future changes (i.e. in a worst-case scenario if all individuals who are currently self-employed were deemed to be employed, what would the additional cost be?).

Our Employment Tax team has significant experience in this field and we can:

  • provide specialist advice on employment status issues;
  • manage HMRC inspections into the status of workers;
  • make recommendations to make the arrangements more robust; and
  • mirror an HMRC status inspection which will put you in a position to understand any strengths and weaknesses within the relationship. It can be also be used to defend a challenge by HMRC or, where appropriate, to obtain a ruling.

For more information please contact Mark Abbs.