Grappling with employment status

Balancing act
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As an employer or engager, you should think about whether the individual you are about to pay is a worker. Unfortunately, that decision gets no easier.

If this conundrum isn’t something that has crossed your mind, then does it provide some measure of comfort to know that you are probably not alone?

Simply put, when it comes to making payments to an individual an engager should consider whether the recipient is an employee or if they are genuinely self employed.

In this article I am not addressing the increasingly complex area ‘off payroll’ working, where owner-manager companies have contracts which may be captured by intermediaries legislation (IR35).

Taylor Review

In response to the Matthew Taylor Review, HM Treasury, together with HMRC and the Department for Business, Energy & Industrial Strategy (BEIS) are currently consulting on how the employment status framework can be improved upon, in order to provide greater certainty to the modern workforce.

This is not the first time this sort of reform has been attempted, and the cynic in me ventures to suggest it won’t be the last.

There is no intention at this time to adapt the tax system to provide a neater fit with the increasing number of employment status options, and for that we are all grateful. The consultation paper focuses on three main areas employee, worker, self employed.

But what, or who, is a worker?

Status for employment rights

Section 230 of the Employment Rights Act 1996 defines a worker as an individual who works under a contract of employment, where they agree to perform personally any work or services for the engager. But they are not in business in their own right and providing the service to the engager as a client.

In essence, all employees are workers, but not all workers are employees. Limb (b) workers, as they are referred to under the act, have a limited number of statutory rights and protections, when compared to the rights that an employee has entitlement to.

From day one a worker has a right to or protection against:

  • unlawful deduction from wages
  • National Minimum Wage
  • paid holidays
  • to be accompanied at a grievance or disciplinary hearing
  • whistleblowing
  • discrimination
  • equal treatment for part-time workers
  • detriment for trade union membership

Employees have further rights or protections either from day one or when they have worked for various eligibility periods. Examples include the right to maternity and adoption leave, and the right to receive a payslip.

Status for tax purposes

When we consider employment status for tax purposes, we have two main systems of tax collection. For employees, this responsibility falls to the employer under the PAYE system, and for the self-employed, we look to self assessment. Again a huge simplification, but we know from research undertaken by the Institute of Fiscal Studies that the tax system can be a key driver in affecting behaviour, and as a system it has long ‘encouraged people to work for their own business rather than be an employee’. Furthermore ‘much time and effort goes into policing the boundaries between legal forms.’

Irreducible minimum

As far back as in 1968 in the case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance, a starting point was provided for factors that the court felt were important to establish whether a contract of service (contract of employment) existed. The core tests established in this case, now referred to as the irreducible minimum, include:

  • Mutuality of obligation (MOO)
  • Control
  • Personal service

The consultation asks whether these are still relevant to the modern workforce and if so, should they be codified within legislation?

Alternatively, and because they are by no means the only factors that are considered when establishing employment status, the consultation paper also acknowledges commentators, who have instead suggested making use of a more ‘simpler, clearer, more coherent test’ using objective and precise criteria or by having a precise structure.

In this way, a well-designed statutory employment status test could provide simplicity and certainty for businesses, and the individual taxpayer, as well as being easier to enforce by the state.

Conclusion

The Taylor Review concluded that the three-tier approach to employment status, which includes worker status, remains relevant to the modern labour market. However, Taylor favours the use of a different title to the less descriptive term of “worker”, and instead recommends that a worker should be referred to as a “dependent contractor”.

Views differ widely as to whether this is a sensible and sufficiently clear alternative, and the consultation remains open to receive your views until 1 June. You can submit your views by email, online, via a response form, or add your comments below and AccountingWEB will submit a response on behalf of the community.

About Samantha Mann

CIPP

CIPP senior policy and research officer

Replies

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23rd May 2018 10:00

The ready mix concrete case should never have happened and is the reason why the employment status is in such a mess.
Let's get one thing straight. The law does not define employment status so it has been left up to the work giver and work doer to decide. That is until Gordon Brown got greedy and wanted the small self-employed to be on PAYE, which HMRC are still pursuing now via MTD.
A "worker" was created by the EU and greedy subcontractors decided to go to tribunal to get "holiday pay", which further complicated matters.
It is my opinion that if you have a proper "contract for services" in place and that contract is strictly adhered to then there is no complications and we go back to how it should be and that is between the work giver and doer. HMRC shouldn't even be getting involved in employment status as it is a commercial decision not a taxation one.

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23rd May 2018 10:25

I have some sympathy for the view above but the world has moved on.
HMRC has convinced Treasury that the contracting sector is "getting away" with paying less tax than they should and therefore are applying ever more desperate measures to collect it such as retrospection and threats of bankruptcy.
Going back to a world which says that IR35 was wrong and should never have been applied is never going to gain the necessary political support. Instead the tax and employment status is now forever linked and only a complete reform will fix that.
The Taylor Report is a good start but fails in some areas because it ignores the basic truth above.

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to G Webber CTA
23rd May 2018 12:40

Politicians haven't got a clue what's going on and they don't want to know. They can't even decide on a brexit strategy.
As for IR35. Not only should it be scrapped along with MTD (mandatory) there should be a complete reform where HMRC do not get involved. If they want more money then they should put the basic rate up.
I believe it will come purely because MTD will not work and HMRC will actually have to start listeneing to us ground level Accountants, instead of our bodies that couldn't give a monkeys so long as the subs keep rolling in.

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to johnjenkins
23rd May 2018 17:03

The simple answer is to abolish NI and adjust tax rates accordingly, with more generous age related personal allowances to protect the retired, means tested as age allowance is at present so the benefit gained by those who need it.
You could even make dividends paid by close companies tax deductible in the company and taxable as employed income on the recipient if they are also a director (with related party anti-avoidance provisions)
Even more radical, ban dividends in private companies where the owners and directors are the same, again with related party anti-avoidance provisions.

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to Smokoe Joe
24th May 2018 09:04

Why ban dividends? Why tax them? Tax has already been paid in the form of corporation tax. What the company does with what's left is up to it not HMRC.
If Government want more money then they should stop fart arsing around and just increase basic rate tax. They wont do that because come election time they would be held to account. So we get this non stop tinkering. Oh by the way Tax Avoidance is legal.

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to johnjenkins
24th May 2018 12:33

johnjenkins wrote:

fart arsing around


John
love the phrase - I may start using it, with your permission.
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to Democratus
24th May 2018 12:49

Be my guest. My mum used to use it years ago. I think it must have come from London originally as it has to be slang.

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By ASF
24th May 2018 14:32

And there was me thinking it must have been a term introduced in IFRS 15!!!!

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