Last week’s budget resulted in some important developments in employment taxation that will be relevant to businesses in the UK.
Off-payroll working (IR35)
The Chancellor announced a Government consultation on the proposed extension of the IR35 tax avoidance reforms to the private sector. At present, only the public sector is subject to the revamped regulations which were introduced in April 2017 and since then levels of compliance in the public sector have improved. Despite this, there has been strong opposition from private sector stakeholders to introducing similar reforms in their sector.
The IR35 rules ensure that individuals who work as employees are taxed as employees, even if they choose to structure their work through a company. However, the compliance burden is placed on the personal service company and many believe that the current rules are being abused by entities which are effectively employers.
Before going ahead with the proposed extension of the rules, the Government will sound out those in the public sector who have already experienced the reforms. HMRC is confident that the public sector has seen an increase in compliance as a result of the reforms and it is therefore likely that the measures will be extended to the private sector, unless the consultation results in a dramatic U-turn.
If the changes are implemented, they will have a significant impact on the cost of using personal service companies with employers being faced with National Insurance Contributions (NICs) if the contractor falls within IR35.
Determining employment status
The Government also announced plans to review the rules for determining employment status. This is to establish whether any changes are required to keep up with the increasing number of “gig economy” workers in the UK. Companies like Uber and Deliveroo are utilising these types of worker more frequently and a recent case features in this Gateley blog.
Employment law recognises three types of employment status, these being employees, the self-employed and workers. However tax law only recognises two, employees and the self-employed. As a result, it is common for HMRC and an Employment Tribunal to come to different conclusions in the same case.
There is no strict, statutory test to determine an individual’s employment status for tax purposes. Generally, employment status is determined by a number of tests that have been established in case law. Whether an individual is deemed to be an employee or self-employed will have significant income tax and NIC consequences for the individual and also for the employer (if there is one).
The budget confirmed that the Government will be publishing a discussion paper as part of its review into the rules. This will explore ‘the case and options for longer-term reform to make the employment status tests for both employment rights and tax clear’. Any new provisions are likely to increase the burden on companies and they should be looking to ensure that they have a clear understanding of the status of the current workforce and begin to identify any potential risks if these new measures are implemented.
The Chancellor also confirmed that proposals to extend class 1A NICs on termination payments to amounts above the income tax exempt amount of £30,000 have been postponed until April 2019. This gives employers an extra year in which to make payments above £30,000 free of any NICs.
An employment status indicator tool has been created by HMRC which can be used to help determine employment status. Whilst the tool is useful when dealing with a ‘clear-cut’ case, it may be less helpful if the facts and circumstances of the individual’s engagement are more complex.