Last year the Taylor Report – ‘Review of Modern Working Practices’, suggested a number of improvements to the employment status framework:
·Government should replace its minimalistic approach to legislation with a clearer outline of tests for employment status, setting out the key principles in primary legislation, and using secondary legislation and guidance to provide more detail.
·The current three-tier approach to employment status, i.e. employee, worker or self-employed, should be retained but those that are eligible for worker rights but not employees should be re-categorised as ‘dependent contractors’.
·A new ‘dependent contractor’ test should place greater emphasis on control and less emphasis on personal service.
·Renewed effort should be made to align the employment status framework with the tax status framework to ensure that the differences between the two systems are reduced to an absolute minimum.
The current framework often fails to provide the clarity and certainty that individuals and businesses need, something that the majority of contractors will testify to. This means that time and energy is wasted in attempting to understand the rules and, as such, the Government wholeheartedly agree with the report’s conclusion.
The Government say that they have made no decisions about whether or how to reform employment status, or to aim for alignment between the test for tax and rights. As this is an important and complex issue, they acknowledge that careful consideration is needed and have recently launched a consultation document, simply titled Employment Status
Views are being sought on a range of options including whether codification of the current case law would result in greater clarity and certainty, or whether alternative approaches would better achieve this. The consultation also invites views on how the detail of the employment status tests may need to be updated to reflect modern working relationships, e.g the gig economy.
For tax, which this article will be confined, to the document considers the tests that define the boundary between those taxed as employees and self-employed. Whilst some have suggested that there should be no boundary for tax at all, this is not considered in consultation.
Current employment status regime
As the labour market has developed and evolved during this century, the application of employment status to new ways of working has become less clear and, for rights in particular, the boundary has blurred between a worker and someone who is self-employed.
Employment status is dependent on the interpretation and application of case law against the specific facts of each case, making it difficult for some individuals to predict their status.
HMRC enforcement of employment status can be costly and time consuming both for the department and the taxpayer, particularly if the matter ends up at either tribunal and/or court.
Current status tests in legislation
In considering the recommendation that the tests for employment status should be enshrined in primary legislation, the Government want to know if people think this the right approach and, if so, what the main principles would be, and whether it would achieve the intended aim.
Codification (arranging laws or rules according to a system) could be achieved in a number of ways, from simply lifting the case law and slotting it into primary legislation or only using selected points of the case law.
In determining whether a contract of service (employment) exists, there are three major persuasive factors that are considered:
The consultation however asks what these concepts mean in the modern labour market, are they relevant to determining employment rights and how they could be set out in legislation. It also asks if the tests of financial risk, integration, provision of equipment and intention of the parties should be included in legislation.
Primary legislation would set out the key principles whereas secondary legislation would add more ‘flesh to the bones’ and can be amended or adapted without an Act of Parliament, as government can change secondary legislation via Statutory Instruments.