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OTS recommendations in their review into employment status
5 March 15 | By: Jas Jhooty
Earlier this week the Office of Tax Simplification (OTS) published their final report on simplifying Employment Status. The aim of this report was to examine the reasons behind employment status being such a thorny issue for employers, workers and HMRC. The report examined the drivers behind this being an issue and interestingly also looked at how other countries have solved similar problems. eg.
- USA: there is a definition of employed status, known as the ‘ABC’ test. This sets three criteria and all have to be satisfied for the individual not to be an employee. Thus the default is employment.
- Ireland: greater use of withholding taxes from the non-employed. As well as an equivalent to the UK’s Construction Industry Scheme (which applies beyond construction) there is a withholding tax applied to the non-employed working for (broadly) public bodies.
- Australia: the 80/20 rule helps decide on employment status. If a contractor derives 80% or more of their income from one client, PAYG (equivalent to PAYE) must be applied. There is also a ‘wholly or mainly labour’ test to be applied to the relevant supply to assess how tax is to be applied.
- Germany: an elective system is in use to allow individuals to opt for one status or another. There are conditions and consequences of course, but one underlying benefit is that the individual (and their engager) is clear about their tax and employment status.
Consequences of getting it wrong
The consequences of the employment status problem include:-
- risk for business (exposure to tax errors and unexpected claims)
- individuals not getting the tax treatment they expected
- HMRC not collecting the correct tax/NICs
- time-consuming disputes
- administrative burdens in resolving matters
A list of the recommendations was set out in the body of the report that could alleviate these problems. The main recommendations are summarised below: -
A joint review between the HMRC, HM Treasury, the Department for Work and Pensions and the Department for Business, Innovation and Skills was recommended to look at the possibility of developing an agreed code of principles on employment status.
Easements and concessions for particular occupations should be formalised in HMRC Statements of Practice and given proper publicity. A review should be launched into the categorisation regulations, with a view to their abolition. The aim would be to have a single set of rules, rather than a range of rules that override the main rules in some circumstances and which can result in differing treatments of the same income for income tax and NICs purposes.
Managing in practice
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, should be explored. This might be in terms of time spent or payments made and could link to a withholding tax idea.
- All of the government’s guidance material on employment status should be brought together in some form of ‘employment status portal’, covering both tax and employment rights.
- HMRC should issue guidance on the types of documentation and actions they would expect to see a business take when engaging a self-employed individual
- HMRC should set up an employment status helpline, where businesses are able to discuss specific queries with an HMRC officer with specialist knowledge of the subject.
- HMRC guidance should have more examples of common real life situations and show how employment status case law applies to them.
- HMRC should consider allocating more resources to employment status and/or ensure that more HMRC employer compliance staff receive specialist training in this area.
- The case law underpinning HMRC’s Employment Status Indicator tool (ESI) needs to be reviewed and updated. A need for the inclusion of more ‘real-life’ business examples with more industry specific questions being asked was highlighted.
A statutory employment test
The OTS believes that the statutory employment test is an idea that needs to be taken further. A sequence to develop such a test was proposed.
- There should be a full study into the alignment of tax and NICs payments and benefits across the employed and self-employed.
- Merging tax and national insurance would remove many of the anomalies within the tax system, and contribute significantly to simplifying issues around employment status by reducing the differentials.
- Tackling employers’ NICs is the key way of taking the heat out of the employment status issue. The OTS believes there is no easy way to abolish employers’ NICs, but an important first step would be to increase transparency around them and hence the understanding of the average individual of how much is being paid in what is, in effect, a payroll tax. That might provoke a better-informed debate on how best to reform the tax.
Deduction of tax at source
The OTS considers that the concept of a wider withholding tax for payments to the non- employed should be explored. This would not be a simple expansion of the Construction Industry Scheme; instead it would be a new system that took advantage of digitisation to establish a simple and responsive deduction system that translated easily into payments on account.
How emTax can help
In our experience employment status reviews are extremely popular with HMRC when it comes to an Employer Compliance Review. The current state of affairs with complex, sometimes contradictory case law has left this a very grey area. We welcome the proposals set out above by the OTS to try to simplify the issues involved.
If you are currently experiencing any problems deciding the employment status of some of your workers or if you require advice on any other employment tax related matter, please do hesitate to contact us.