The Office of Tax Simplification (OTS) has published a lengthy report setting out its conclusions from a review into the divide between employment and self-employment status in the context of UK tax law. The report was published on 3 March 2015 and is the result of an extensive review of the existing UK system, in which there is no statutory or other prescribed definition of self-employment, and which uses a number of different criteria to establish employment status.
The OTS recognises that the consequences of the distinction are significant. A finding of employment or otherwise can significantly affect the tax position of both the worker and the employer, particularly in the context of national insurance contributions (NICs). Clearly, it also has very significant effects for employment rights, although slightly different tests are used in this context (thereby adding to the complexity).
It is therefore perhaps surprising that there is no statutory definition of the term, or at least more by way of guidance from HMRC. A relatively common criticism has been that this absence of a clear test results in a lack of certainty for all parties involved.
The OTS acknowledges that the area is a difficult one, particularly in the context of a more modern and flexible workforce in which a binary distinction between “employed” and “self-employed” may well no longer be appropriate. The OTS therefore makes a series of recommendations, calling for both short to medium term changes and more comprehensive, longer term reforms.
Ideally, the OTS would like HMRC and the relevant government departments to work together on a coherent set of principles, developed from case law, to guide and govern decisions on employment status. However, if this cannot be achieved in practice, it suggests the development of clearer guidance, to include principles of application. This could also feed into work on improving HMRC's existing employment status indicator tool, according to the report, and the OTS notes the current perception that this tool is currently “biased” towards employment over self-employment.
Short to medium term recommendations include the provision of better guidance by HMRC, available in one place with more real-life examples. There should also be help for individuals and small businesses to preclude or reduce the burden of HMRC enquiries, and the creation of an HMRC employment status helpline. Longer term ideas included:
- the development of a ‘safe harbour’ approach where an employer relies on HMRC advice and the report was open about a possible ‘de minimis’ period of time or levels of payment before employment status needs to be considered;
- a full study into the alignment of tax and NICs rates and benefits for the employed and self-employed;
- a feasibility study into a statutory employment test; and
- a withholding tax for payments for workers whose tax status is unclear.
Significantly, the OTS concluded that whether or not an appropriate statutory test is introduced, there was an almost universal call for the rules to apply to both tax and employment rights and to give employers and employees more certainty.
Where is this going, and how quickly?
The OTS was charged with reporting in time for the 2015 Budget, and has done so. However, on the eve of a general election clearly much of the outcome will depend on the constitution of the next government, and its attitude to this area of reform.
The OTS itself acknowledges that most of its ideas will require significant change and take significant time. Success or otherwise will depend largely on whether the OTS is retained as an entity by the next government. Inevitably, the longer term outcome of this report will be politically driven and will need to compete with other items on the current political agenda.
Interested parties are encouraged to comment on the conclusions of the report and a summary of the comments received is planned.
The full OTS report can be found here.