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The report lays bare the complexity of the current system with different tests for employment used for tax, employment law and pensions auto-enrolment.
However, IR35 was not included within the scope of this review, although the controversial contractors tax nevertheless merits more than 60 mentions in the report. The report also adds that as the IR35 Forum has recently released its report into the administration of IR35 and the opportunities for wider publicity, this report should examine where there is synergy between the two.
Out-of-date
There is no definition of 'self-employment' in law leaving businesses, individuals and HM Revenue and Customs to wade through case law to establish employment status. Special categorisation rules and practices help some but can create anomalies.
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John Whiting, Tax Director of the Office of Tax Simplification, said: “The tax system is stuck in an out-of-date mindset. In the 1950s and 1960s the distinction between employees and the classic self-employed jobbing plumber was clear and easy. Nowadays working patterns are hugely varied, freelancing is a way of life for many and that simple split doesn’t work often enough.
“This causes uncertainty, risk and administrative burdens all round. We have heard from businesses about transactions being delayed or even abandoned due to the risk posed by employment status uncertainty.
“This is a difficult area with no simple solutions. We identify both direct ways of simplifying things – such as streamlining definitions – and indirect ones, which would take the heat out of the issue. Some should be acted on in the short to medium term, others are promising routes to reform that warrant further work but which would mean major changes.”
Improvements
The OTS recommends various improvements including:
- Better employment status guidance, in one place with more real-life examples;
- Help for individuals and small businesses on what action a business should take, and the documentation it should have, when engaging a self-employed individual, to preclude or reduce the burden of HMRC enquiries;
- Setting up a HMRC employment status helpline and allocating more resources to this area.
The OTS believes that HMRC’s Employment Status Indicator (ESI) tool is a valuable resource, but it needs to be expanded and protocols developed so it can be relied upon.
Longer-term
The OTS’s longer-term ideas for further work include:
- Considering a ‘safe harbour’ approach where an employer relied on HMRC advice and was open about its arrangements;
- A possible ‘de minimis’ period of time or level of payment before employment status needs to be considered;
- The Government conducting a full study into aligning tax and NIC rates as well as the benefits available for the employed and self-employed;
- Carrying out a feasibility study into a statutory employment test;
- Explore a withholding tax for payments to the non-employed whose tax status is unclear.
John Whiting said: “All these longer-term ideas have pros and cons: for example we are very aware of the pressures that can be put on the low paid to take work in a way that saves the engager money. Many of the issues come back to bringing Income Tax and NICs together and we repeat our previous recommendations that merging tax and National Insurance would remove many anomalies from the tax system. In particular, employers’ NICs does seem to be the elephant in the room of reform.”
Welcome
Freelancer and self-employed trade group, IPSE, welcomed the report. Chris Bryce, IPSE’s CEO, supported the review of employment status and was on the consultative committee which informed the report.
He said: “Employment status is overly complex and urgently needs to be reformed. We welcome the work the OTS has done to bring this issue to light and we hope this report will bring about real clarity for individuals and businesses.
“The recommendations are wide ranging and radical. Some, such as improved guidance on status we enthusiastically welcome while others, such as the return to the Employment Status Indicator tool, we will need to give further consideration. Certainly our previous experiences with the ESI tool have not been positive so it will need to be significantly changed if it is to become of real value to independent professionals and the self-employed.”
One section of the report is given over to what is described as a ‘third way’ - an intermediate status between employed and self-employed. The OTS re are possibilities in this route but there are also downsides and problems. Overall we are not recommending it as a way forward but we do not dismiss it and would welcome further input addressing some of the issues we highlight.
The OTS believes this idea has potential, but says that more work is needed to show whether it can work in practice.
Mr Bryce said: “Many industry experts have been calling for a freelancer limited company. We are glad the OTS recognise the potential of this idea and we agree that it needs to be developed further.”
Interested parties are encouraged to comment on the conclusions and a summary of comments received is planned.
The report is available in full: OTS report on employment status.
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Susie Hughes © Shout99 2015
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