Summary of the consultation on Employment Status

    We believe that there are three important considerations arising from the consultation:
     
    • Mutuality of Obligations (MOO) makes a welcome and deserved “comeback” as a key status test ;
    • The government favours an alignment between the tax and employment rights and the introduction of a new category of worker, the “dependent contractor” could well result;
    • Whatever is decided as an outcome of this consultation will have a direct impact on IR35 and the impending consultation on bringing the public sector rules into the private sector.

    The consultation follows on from the Taylor Review, which commissioned against the backdrop of the “gig economy” worker status cases, was completed in 2017 and made a number of recommendations to changes on the law of worker status. While Taylor focussed heavily on employment law considerations, it made a number of suggestions in respect of tax. This consultation picks up from where the Taylor Review left off, and seeks to implement some of those recommendations. We consider the main sections and their implications:

    The Review of Modern Working Practices

    This section explains briefly the purpose of the Taylor Review and highlights that while tax was not part of the review, the final Report concluded that it was not possible to separate employment law and tax entirely.
    The government recognises that the law on employment status is central to both employment rights and the tax system.

    The current legislation and frameworks

    This section looks at the current rights associated with different classes of individual (employee, worker and self-employed) from an employment law perspective.  It considers the issues surrounding a lack of legislative clarity, particularly for those who have atypical working patterns and practices, and the issue of establishing Limb (b) worker status, which applies to someone who works under a contract, provides personal service, and is not carrying out a business or profession under that contract to a  client or customer.

    It continues to examine the tax regime applied to the different classes of individuals and confirms that while in the employment arena there are typically three classes of engagement of individuals, in the tax arena, engagements will fall within one of two: employed or self-employed.

    It highlights the factors Tribunals must consider in establishing whether a contract of service exists - MOO, Control and Personal Service - and notes that for “worker status” the benchmark considerations are lower and the Tribunal is looking at a reduced test as provided in statute.

    What is very interesting is that Mutuality of Obligations is the first of these principles to be discussed. Given HMRC’s interpretation of MOO - and tax tribunal reluctance to reaffirm its importance – as well as the glaring omission of any questions relating to HMRC’s online Check of Tax Status Tool (CEST), it is encouraging that the consultation includes within its definition of MOO that there is an obligation to provide and an obligation to carry out work, as opposed to HMRC’s long-standing view that MOO is simply work for wage. 

    Issues with the current employment status regimes

    Here the consultation considers two main issues:
     
    1. Open to interpretation.  Employment status is dependent on interpretation and application of case law against facts of a particular case, thereby making them difficult to apply to different types of engagements and leaves it open to unscrupulous engagers to mis-categorise their employees to deny those individuals employment rights.
    2. Complexity.  It can be a complex issue to interpret and ascertain correct status, especially for those in atypical work. Currently, an individual’s employment status could be different for tax and employment purposes making it too complex for individuals to ascertain their own employment status – not least because a court judgement is likely to be only binding on that particular case.It also highlights that the need to consider case law is a potential barrier to individuals.

    Legislating for the current employment status tests

    The Taylor Report recommended that the “government should replace the minimalistic approach to legislation with a clearer outline of the tests for employment status, setting out the key principles in primary legislation, and using secondary legislation and guidance to provide more detail”.

    The consultation states that the aim is to provide clearer understanding and greater certainty to individuals and businesses, and the codification of existing case law may be the best way to achieve this.

    It considers the three fundamental status (MOO, Control, Personal Service) and how these might be placed within a legislative framework to provide clarity without diminishing judicial flexibility in their application. It also addresses some of the secondary factors of status (including intention of the parties, provision of equipment etc.) and whether the inclusion of these factors in the legislation would be beneficial.

    A better employment status test

    The consultation asks whether a more radical shift is needed, and explores the possibility of implementing a new test for self-employed status altogether.  It considers two ways in which the test could be more precise:
     
    1. More precise criteria; or,
    2. More precise structure.

    When looking at more precise criteria, the government considers introducing new criteria such as length of time with one engager, percentage of income derived from one engager and where the individual provides the services.   

    It then considers a less complex test for status, with fewer criteria, such as the existing supervision, direction and control test used in connection with the agency legislation in s44 ITEPA (2003).

    This section also considers the development of an online tool which could complement or stand in place of legislative provisions.

    It concludes by looking at whether there should be a different a tax system in place for employees and self-employed, or whether the tax regimes should be more closely aligned.

    The worker employment status for employment rights

    This chapter considers the non-tax issues of rights associated with worker status and highlights the commentary of the Taylor Review of the three tier rights system for individuals: employee, worker and self-employed.

    It questions whether the worker status test should be refined to provide a clear distinction between employee and worker. It considers the current worker status tests: Is there a contract? Is the individual obliged to undertake the work personally? Is the individual providing services as a business to a client or customer?

    It then goes over much of the same ground as the section concerned with legislating for the current employment status tests, but does also consider the Taylor Review recommendation as to whether  the definition of worker should be replaced with the term “dependent contractor”.

    Defining self-employed and employers  
     
    This section confirms that there exists no statutory definition of self-employed and that it may be preferable for this to remain undefined as a formal employment status because the courts might not be able to make a judgement on someone’s employment status if their circumstances do not fit any statutorily defined employment statuses. Moreover, there is concern that unscrupulous employers might design contracts which fall within the letter but not the spirit of the law. However, it does also ask whether there should be a definition of an employer (other than what it considers the “minimalistic” definition in the Employment Rights Act 1996) to acknowledge the different working practices of the 21st Century.

    Alignment between tax and employment rights
    The final section acknowledges that the employment and tax frameworks do not fully align, and it would not be possible to give employee and self-employed the same meaning across both the employment and tax systems without introducing a third category of taxation for worker status (or placing worker status under the employed earners regime).

    The Consultation notes that Taylor recommended that the definition of self-employed should be aligned as far as possible in the longer term, by having both individuals who are employees and those who are workers or dependent contractors being subject to the employment tax regime.
     
    Yet it also accepts that others have pointed out that the two systems have different objectives: one deciding who is entitled to certain employment rights and the other determining the tax regime that applies to the income they receive. Therefore, aligning definitions across the two systems could create steeper cliff edges and stronger incentives for mis-categorisation.  

    Conclusion

    The message from government is clear: self employment status is high on its agenda. We will continue to advise all our clients to look to their contracts and working practices to ensure they are compliant with current laws and legislation, as this is the key to ensuring protection now, and in respective of retrospective actions if the law on employment status does change.   

    Looking forward, the consultation will produce a number of possible outcomes:
     
    1. A statutory definition of a contact of service for tax purposes (aligned with employment law) either based on current case law principles or a new employment test.
    2. Preservation of “worker” status for employment rights but redefined as “dependent contractor” status.
    3. Taxation for dependent contractors as employed earners (and engagers as employers).
    4. The outcome will affect the consultation on IR35; not least because the acceptance of MOO as a test for self employment means it will have to be reintroduced into HMRC’s CEST tool and their approach to IR35 enquiries.

    Whatever the final outcome, Accountax welcomes the concept of an alignment between employment and tax laws and believes that a legislative definition of worker/self employment status would be helpful.  However, the legislation would need to be based on existing case law principles, which already offer clear guidance on what constitutes a contract of service; and as a consequence rendering the need to produce a new test for employment status wholly unnecessary.

    We will be providing a consultation response within the next couple of months and would welcome any contribution from our clients.  If there is anything you would like us to include within our response please send your thoughts and comments to us at mail@accountaxconsulting.com.