09 Feb 2018

Consultation on Employment Status

0 Comment

The Government have started their consultation process on employment status.

The 53 page document goes into detail about the current problems associated with employment status and the various options available to the Government to address the issues with 64 questions open for response. Once all responses have been received by the 1 June 2018 and reviewed, the government will then be in a position to decide the future of self-employment and whether they will change the laws relating to when an individual is deemed employed, self-employed or a worker/dependant contractor.

The problems associated with employment status

The consultation document identified three main problems associated with the current law.

The first of which is the extent to which employment status is open to interpretation as businesses and individuals are left to interpret case law and apply it to how they work meaning it is very easy to reach the wrong conclusion even with the best intentions. Being open to interpretation also enables businesses to miscategorise workers into a different category on purpose which the government are keen to stop.

The next issue identified is that of complexity. In both employment and tax law, the legislation is limited in its detail as to when an individual is an employee or not and it is left for the tribunals to determine the cases and set case law precedents. This is all well and good but as each case has different facts it can be difficult for companies and individuals to be aware of the relevant case law and principles and how they may or may not apply to their scenario. Another area of confusion is that employment law and tax law are slightly different when it comes to assessing employment status which only makes the position more difficult for the taxpayer.

The last problem identified is that only a court can resolve a dispute and it is very time consuming and costly for HMRC and the taxpayer to have to spend years arguing a case and end up at a tax tribunal. If the law was less complex the hope is that fewer cases would need to go to a tribunal to be resolved.

Employment status going forward

The Government have listed a number of possible solutions to tackle the above problems and are seeking commentary to assess the workability of each along with any negative effects caused.

Case law put into legislation?

The first section of text relates to whether the current principles of employment status should be written into legislation (personal service, control and mutuality of obligation). The document goes on to question whether any other factors should be taken into account (such as financial risk, the provision of equipment, being part and parcel of the business and the intention of the parties), how much detail would be needed in the legislation and whether secondary legislation should also be included so that the government are able to amend the tests going forward with relative ease.

Our view is that whilst it may be helpful to have the principles set out in legislation they are fairly well known anyway and so it may not make the law that much clearer because it would still be complicated, open to interpretation and be costly to resolve. If it does not solve any of the problems raised, this surely isn’t the answer. The other problem as evidenced by the agency legislation is that if is it written too broadly it just catches everyone and if it is too narrow it will be too easy to get round. Secondary legislation also cannot be a great step forward because any changes to the legislation in the future could slip through without much publication and companies may not be up to date and yet face stiff penalties as a result.

Objective test instead?

The next set of options considered in the document is whether to change the employment status tests to more objective criteria. An example being whether someone can be self-employed depending on the length of engagement i.e. if they work for the same client for a certain period of time they will automatically be employed. Whilst this would make the law clear it would have huge consequences across industry and pull many individuals within the remit of being employed when they still work in a way that is more in line with self-employment. There are also other considerations like whether a break in the work or working for others would restart the clock and if so how long would such a break need to be. This could also lead to companies simply getting other businesses to pay their subcontractors now and then to break the cycle.

There is also the question raised over whether self-employment could be determined by the percentage of work undertaken from one engager but this could also have the same issues as above. The courts have found on many occasions that the length of engagement or working for one client is not an indicator of someone being an employee. If for example an individual undertakes a contract for 2 years for a client and the individual is responsible for providing all equipment, plant and machinery, all materials and all the personnel necessary and that individual is left to handle the whole project from start to finish including taking any risks that go with it. It would not be right to say that if they have one main engager for that period or the individuals contract is for 2 years they are an employee. We believe that any such approach cannot have a single test and that there would need to be a number of ways in which the individuals could still be treated as self-employed.

The document mentions at the end that they do not wish to bring in legislation defining self-employment because it is more desirable to have a definition of an employee (and dependant contractor) and then anyone else that doesn’t fit that mould can be self-employed. At the point there are distinct categories, it may be possible that people do not fit into any category and technically are neither employed, self-employed or a worker. We feel that if the tests were objective tests like the length of duration you would have the same people where they do not meet the criteria for being self-employed but equally they are neither employees or workers.

Hierarchy of questions

The consultation document references the system in Germany where there is a hierarchy of questions with the ones near the top having more weight. This approach may have merit and currently the courts do give more weight to certain factors so it would not be a significant shift. The question mark however would be whether this would provide any greater clarity for people as it would still be open to interpretation (although more guided) and would still need to be resolved by the tax tribunals which leads us back to the beginning with the current problems.

IR35

Last of all the consultation makes reference to individuals that work through their own limited companies who are caught by the IR35 legislation and therefore taxed like an employee but not entitled to any employment rights. This is undoubtedly an area that needs addressing and one of the biggest errors with the IR35 legislation has always been that it only relates to tax legislation. If an individual is taxed as an employee, they should surely be entitled to employment rights like an employee.

Responses

The Consultation document highlights the difficulty in this area of law and that there is no easy answer, this is in part way the document is 53 pages with 64 questions. It is good to see that the government are covering all options and exploring the benefits and drawbacks with each rather than simply putting forward their suggested way to start with. This is likely to be a long process and the document acknowledges that any change will take time so that companies can adapt and fully consider it.

We would recommend that companies that engage self-employed people and their advisors give this document some attention and send a response even if it is only limited to answering some of the questions. The potential changes coming from this document could be huge and as such it is important the government are aware of all issues and consequences.

 

 

 

 

 

 

 

 

 

 

 

[top]