Out-Law / Your Daily Need-To-Know

‘Not right time’ for alignment of UK employment status law for rights and tax

Out-Law News | 27 Jul 2022 | 2:54 pm | 2 min. read

The UK government will not be bringing forward proposals to align the employment status frameworks for rights and tax, notwithstanding that there could be some benefits to greater alignment, it has confirmed.

The announcement was included as part of the government’s response to its consultation on employment status (32-page / 350KB PDF), which it published in February 2018.

Employment tax expert Penny Simmons of Pinsent Masons said that it was “disappointing although unsurprising” that the government would not be reforming the law on employment status for tax purposes in the short term.

The government’s response document confirms that there is a “lack of clarity” in the law on employment status for tax purposes and that “further uncertainty can be caused by the non-alignment of the status frameworks for tax and rights, which means that in some instances, an individual holds the status of self-employed for tax, but not for employment rights”. However, the government does not think it is the “right time” to “overhaul the employment status frameworks for rights and for tax” in the context of economic recovery from the Covid-19 pandemic.

“There seems to be an attitude that reforming the rules and finding a workable solution is just too difficult at the moment and so should be shelved indefinitely,” Simmons said. “Although unsurprising, it is very disappointing that it has taken the government four years to respond to its own consultation about reform by basically saying that despite the potential benefits of reform it is not going to do anything.”

There is no single legislative test to determine employment status for tax purposes. The test has been developed through case law and involves considering several factors including the level of control that the client exerts over the individual; whether ‘mutuality of obligation’ exists between the parties; and whether the contractor is in business on their own account. Case law has highlighted that the test is often highly nuanced and the outcome dependent on the facts of each case.

Simmons said that uncertainty in the law “is evident in the recent slew of IR35 court decisions“, referring to the tax provisions on employment status for tax purposes. “In one recent case, the Court of Appeal appeared to indicate that the test may be overly complex, noting that it would be ‘desirable if there were one clear test or approach to determining whether a person was an employee’,” she said.

The response document states that the government will “work closely with stakeholders to explore longer-term options to improve the employment status system for tax to ensure it is as clear as possible and usable for all parties”.

“The government’s confirmation that it will explore longer-term options for reform provides the only morsel of hope for substantive reform at this point, and it is hoped that these discussions will be as constructive and productive as possible,” said Simmons.

The government has published new guidance setting out the current law on employment status as it applies to employment rights. This includes separate guidance for businesses and individuals, as well as more detailed guidance for HR and legal professionals.