Employed or self-employed, that is the question... or is it?

Employed or self-employed, that is the question... or is it?

Earlier this month, the Office of Tax Simplification (OTS) published its report into simplifying the ever knotty subject of how to determine whether a worker is employed or self-employed for tax purposes (Office of Tax Simplification – Employment Status report, March 2015). The report itself is somewhat substantial, so only a few highlights have been reproduced, here.

What the OTS did say was that ‘The UK government and tax authorities need to produce clearer guidance, with more real-life examples, to help firms decide whether a worker is employed or self-employed for tax purposes’. Hurrah!

Where are we now?

Self-employment is not currently defined by UK law and different employment status tests are used for tax, employment law and pensions auto-enrolment. Reporting on the complexities of the existing system and making recommendations for improvement, the OTS said that the existing self-employment indicator operated by HM Revenue and Customs was a ‘valuable resource’ but it required significant expansion and reliability improvements.

The OTS recognises there is a problem, has set out the reasons for it, and also established there is a real need to improve the situation acknowledging the drivers for uncertainty and for employment status being a problem are varied.

People are looking for more flexibility in their daily lives and this can come in many guises: to be, or not to be, an employee? Inevitably this leads to the rest of us who have to consider whether someone is self-employed for tax or employment law purposes, and the resultant scratching of heads, conferring with colleagues, researching various points of law, and concluding this is as clear as mud.

Because the dividing line for employment status is blurred rather than clear, it brings a lack of certainty and invites attempts to ‘game the rules’.

So what’s next?

It’s quite obvious that better guidance and a new helpline could assist firms in the short term, but I’m sure most of us are interested in the long term and what recommendations are going to be made for improvements. This isn’t a short term fix; the work place has changed considerably over the last few years and there are no obvious quick and easy improvements that could be made to achieve a useful difference to the employment status situation.

OTS have made numerous recommendations, including:

  • Joint review between HMRC, HM Treasury, the Department for Work and Pensions and the Department for Business, Innovation and Skills which looks at the possibility of developing an agreed code of principles on employment status
  • Exploring the idea of a set ‘de minimis’ level for payments to an individual who carries out some activities for a business, which would definitely not be an employment
  • The Government’s guidance material on employment status covering both tax and employment rights, brought together in some form of ‘employment status portal’
  • A ‘safe harbour’ where an employer was open about its arrangements and relied on HMRC advice
  • HMRC to set up an employment status helpline where businesses are able to discuss specific queries with an HMRC officer with specialist knowledge of the subject

‘IR35’ is outside the OTS terms of reference for this project but they do acknowledge they have had regular points raised on the subject. They’ve seen the reports of the IR35 Forum and say ‘it would seem pertinent to explore if there is any synergy between the recommendations for IR35 purposes and those of the OTS under this employment status review’.

For those of you who are part of an in house legal/compliance team supplying ‘limited company contractors’, one could assume that since legislation such as ‘IR35’ has been around now for quite some years, this would be one of the many considerations by the OTS as part of their report. Does this sound familiar… "is my, or how do I make my, contract IR35 friendly?"

Freelancing is a way of life for some, as is being an employee to others. What is clear is that the OTS’ report is welcomed and a review of employment status is critical; this needs to remove the complexity of guidance we currently have and consider all options available to take into account our ever changing workforce.

- Karen Ainsworth-Smith, Legal Services