28 Nov 2017

Future of self-employment

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Chart_3Not a week goes by at the moment without questions being raised about the law surrounding employment status.

A couple of weeks ago Deliveroo were in the news for successfully showing the individuals they engage are not “workers” – a problem that Uber are currently appealing.

On the 15th November the Work and Pensions and Business, Energy and Industrial Strategy Committee released the document  “A framework for modern employment” which considered modern employment practices and how the law could be further improved to keep up to date with the rapidly changing workplace. This put forward a number of recommendations (much like the Matthew Taylor review which was carried out over the course of 2017) for the government to consider, consult on and potentially implement.

Last of all, the Chancellor confirmed in the Autumn Budget that the government would be consulting on amending the IR35 rules in the private sector which would bring it in line with the changes made in 2017 in the public sector.

With so much in the air with regard to employment status it is important to stay on top of this evolving area. The consequences of getting employment status wrong, whether it be a claim from an employee or HMRC, are significant and with so much changing all the time it would be easy to get caught out.

A Framework Agreement for Modern Employment

The Framework review put more pressure on the government to address employment status and make the law clearer so that workers have more protection. Some of the recommendations suggested included a “Worker by default” position whereby individuals working for companies of a certain size will by default be deemed a worker instead of self-employed therefore shifting the onus of proof away from the individual and onto the company. This has not been previously suggested by government bodies and is an interesting idea. We understand why such a position might be adopted because it would help stop the exploitation of workers and it would make it considerably easier for individuals to benefit from employment rights. The downside of such an approach is that it may not actually be wanted by the workers themselves. When Uber recently lost their case, it was only a handful of individuals that wanted “worker” status and most of the workers actually wanted to remain self-employed. The same could be true across other industries but construction would be a prime example. Many individuals in construction like being self-employed and would not want to be deemed a worker by default, there is a very real possibility that wages would be pushed down as companies have to account for the extra burden of the individuals being deemed a worker or even that companies are less likely to recruit because it becomes considerably less appealing and more onerous. If such an approach were to be adopted we believe a thorough field analysis would be needed to ensure it is a measure that is not only necessary but actually wanted.

Another area of significance in the report is that there are calls once again for legislation to set out when an individual is employed or self-employed. This is something Matthew Taylor also touched upon in the summer but accepted that introducing such legislation would be extremely difficult and would have to be approached over time and with great caution (it is worth remembering that employment status legislation has not been introduced in the last 100 years for this precise reason). The Framework report suggests legislation for this issue but what has been suggested would do very little to clarify the area and could quite easily make the position more vague and unpredictable. To add further worry the suggested employment status tests are also out of touch with current case law such as the suggestion that part of the test should be whether the individual is “integrated into the other party’s business”, even though the courts have stated that this is no longer a relevant point (one example being the case of Eric Newman v HMRC) and even HMRC accept that this doesn’t form part of the question over whether an individual is self-employed.

The report echo’s the comments in the Matthew Taylor review that there should be more emphasis on control and less on whether personal service is required. This is understandable given that “employers” can simply argue that personal service isn’t required and the individuals could have sent others in their place but we do feel this does the courts a disservice. The employment and tax tribunals are very much alive to the fact that such statements can be false and used to misrepresent the situation. This has been evident in many, many cases over the years and the courts are perfectly adept at establishing the real position. Moving away from personal service and over to control would be in line with some other recent changes in tax legislation but that is still a highly complicated area particularly with the way in which people work nowadays and could cause a significant amount of uncertainty. Our view is that the requirement for personal service should still be a fundamental part of whether an individual is an employee, worker or self-employed going forward, this is unlikely to be the case for too long however.

Autumn Budget 

It was widely expected that employment status would feature in the Chancellors budget this year and those expectations were well founded.

In the Autumn Budget the Chancellor confirmed that the government would release a consultation paper about IR35 in the private sector. This is a natural progression following on from the changes made in April 2017 to individuals that provide services via a personal service company in the public sector. When the changes to the public sector were announced in 2016 the government stated that they had no immediate plans to alter the private sector but it was always just a case of when and unsurprisingly, that “when” occurred less than a year later.

So the key question, what is going to change?

IR35 currently looks at the relationship between an individual that provides services via their own company and the end client and essentially asks whether the relationship would be one of an employer/employee if the corporate structure in between were not in existence. If the individual would have been deemed an employee, IR35 applies and the individual’s company would be liable for unpaid tax and national insurance (including coughing up the employer’s national insurance).

What the government are going to consult on (and have already implemented in the public sector) is loving the liability from the individual’s company to the client or entity that pays the limited company. This would be a huge shift with major consequences and would need to be very well publicised to ensure companies are aware of the change in liabilities so they can act accordingly.

The reason for the change is that very few companies consider themselves (or perhaps more accurately declare themselves) caught by this legislation and so HMRC’s tax yield for IR35 is very poor. On top of this, it takes a considerable amount of resource for HMRC to tackle this area one tax payer at a time. If however the liability is moved to the end client, not only will the client have the funds or assets to pay any liability (meaning they will take the issue more seriously) but HMRC can also target a considerable number of tax payers all working for the same client or agency rather than one person at a time. This worked wonders in the public sector and there has been a huge increase in tax and NI collected in the public sector in the last six months. It would almost be illogical for HMRC not to roll this out in the private sector?

What can we expect from the consultation?

We would be astonished if the legislation wasn’t changed. There was an outcry when HMRC suggested amending the agency legislation and the IR35 legislation in the public sector but the government pressed ahead with it anyway. There is little reason to believe the position will be any different here and in theory IR35 should be aligned across sectors because there is no good reason for the rules to be different in the public sector. It is more likely that the consultation will be used to iron out any issues that have arisen in the public sector rather than debate whether the change should be actually be forthcoming. We would still expect the question over whether this is necessary to be raised in the consultation but don’t believe any debate on the subject will stop it from going through.

There may well be anti avoidance provisions introduced as this seems to be a common trend to ensure any legislation actually has the teeth to bite with. It is also perfectly plausible that clearer guidance or rules relating to IR35 will be introduced, if this is the case there would no doubt be a significant emphasis on the level of control to the degree where it could be the only relevant factor.

Only time will tell what will actually happen but it would be prudent for businesses to consider how they engage with personal service companies because judging from recent legislation changes on employment status, any change could be implemented with very little notice.