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 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 The OTS’s report clearly highlighted the central issue: “…the tax system is still in many ways stuck in an out-of-date mind-set: of categorising workers as either employees, firmly on the payroll, or self-employed.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 1950’s and 1960’s 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.
We have also seen the highly publicised 2016 Uber tribunal ruling, in which Uber drivers were successful in their bid to be awarded employee rights. 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 calling them self-employed.
So change is likely and it would be wise for organisations to think about the potential impact of any changes on 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?
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 National Insurance Contributions on a workers 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 (i.e. whether someone is employed or self-employed) is determined mostly by case law and associated HMRC guidance, including an employment status indicator. The tests are numerous, subjective and can produce inconclusive results. 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 on-line platforms.
What is Taylor recommending?
The Taylor Review makes a number of recommendations which seek to address the issues outlined above, including making the determination of employment status relevant for the working arrangements that exist in today’s economy. The key recommendations are as follows:
What should employers do?
- 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 individuals’ status (i.e. rather than a heavy reliance on case law). There should also be greater clarity, perhaps with the introduction of a 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.
- National Insurance Contributions for the self-employed should be aligned with those of the employed, reducing the incentive for individuals to contrive bogus self-employment arrangements.
For 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. how many self-employed, contracts, 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 National Insurance Contributions) to assess risk of challenge to status; and
- assess the potential cost and business risk associated with any future changes (e.g. in a worst case scenario if all individuals who are currently self-employed were deemed to be employed, what would the additional cost be?).
We will be hosting a Post Taylor Review: The future of employment status for tax and PAYE Webinar on Friday 8 September, please click here to register.
For more information please contact Lee Hamilton