Office for tax simplification makes final report on employment status

Posted on February 24, 2015

The Office for Tax Simplification (OTS) has published its final report on employment status. A working relationship can take many forms, for tax and employment law purposes it is necessary to draw a distinction between a person being employed or self-employed. In most cases this is obvious but in some it can be a difficult judgement. The OTS report into the confusion often encountered in this area focused its analysis on three key aspects:

  1. Liability for national insurance is completely different depending on whether an individual is employed or self-employed; the way income tax is collected is also different.
  2. Often of greater significance to business is the difference in employment rights between the employed and the self-employed.
  3. The test for employment status is often blurred and this invites the temptation to manipulate the application of the rules.

Currently, it can often be beneficial for businesses to engage staff on a self-employed basis. They do not have to make employer national insurance contributions, they do not have to administer PAYE and they do not need to give employment rights such as paid holiday or the right to maternity/paternity leave. An employer that does this however takes a risk that the person they engage is not considered to be genuinely self employed by HMRC or an employment tribunal. The OTS states that there are ‘no quick wins’ to this situation but that the HMRC guidance in this area should be made more ‘user-friendly’. It also suggests that some longer term work could include:

  • Developing a statutory employment status test. Currently the rules relating to employment status are laid out in numerous employment and tax tribunal decisions. Having the test on a statutory footing may help to simplify matters.
  • Considering a ‘safe harbour’ approach. This would be where a business could be open with HMRC and ask for advice on how its arrangements would be considered. It would then be able to rely on that advice.
  • Establishing a de minimis period of time or level of payment before employment status needs to be considered. Under this principle if an individual was never in service for long enough or never reached the prescribed level of payment then they would never be considered to be an employee.
  • The OTS considered whether merging income tax and national insurance would simplify the tax position.

While the report certainly makes for interesting reading this is a complex area and the lack of any quick solutions means it is likely to remain so for the foreseeable future. The full report can be found here: https://www.gov.uk/government/publications/employment-status-review