The government has confirmed it will not be bringing forward proposals to align the employment status frameworks for tax and employment rights. That’s notwithstanding a host of significant benefits that alignment would bring.
The government’s position was made clear in response to its consultation on employment status which dates back to February 2018. They say it is not 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. It means that in some instances an individual holds the status of self-employed for tax, but not for employment rights – not ideal.
Writing for Out-Law, tax specialist Penny Simmons said she wasn’t surprised by the announcement. She said: ‘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.’
It means those difficulties will continue to be left to employers to grapple with, and it’s not easy. Chris Thomas is one of the lawyers in our tax team who has been advising clients on this in recent times and he joined me by phone to discuss it. I started by asking Chris what he made of the government’s announcement:
Chris Thomas: “To put it politely it's very disappointing. It has taken them four years to come up with a response that says pretty much nothing really of any value at all, certainly from the tax perspective, and I think not really from the employment law angle either. It just feels like they're kick the can down the road yet again and they're not really taking any meaningful action at all to address the points that the Taylor Review was looking at, and all of the very real difficulties that end users have got when they're working through the minefield of the ways in which people could be engaged and, in particular, the difficulties that they have when they're determining the status of off-payroll workers. I think it adds insult to injury a bit that the consultation response refers to the majority of status cases being ‘simple and clear’. That may be the case, I suppose, for a reasonable chunk of them but certainly for the sort that a lot of our clients have been looking at, that's the very last thing they are, and it can be really quite difficult to reach a clear view because it's so subjective and it's so nuanced, the principles you're trying to apply, and the case law is constantly shifting as well. So it's frustrating. We all accept that it wouldn't be easy to come up with a statutory test or a simple black and white you're in or you're out - it is a very difficult area - but equally they've done that with things like statutory residence and people said it couldn't be done and then they did. So, yes, it just feels like a bit of a cop out and we're still left with rather awkward differences between the test for employment law and tax and we've still got the three tier classification for employment purposes, and two tier for tax, and really it just perpetuates all of the unsatisfactory aspects of the current regime with no prospect of that changing.”
Joe Glavina: “Given the government is leaving it to the courts is there anything employers can do to minimise the risk of a potential court decision going against them?”
Chris Thomas: “Yes. So, I think the first thing to do is to make sure you're regularly revisiting your status determinations and, in particular, if your organisation hasn't looked at them since the IR35 regime first came in last April - so we're going to be approaching 18 months before too long - it really is time to think about revisiting those, partly just because that's something that you should do in any event to make sure you're capturing any changes and circumstances of the relevant individuals, but also, because case law has moved on in some quite significant ways during that period. We’ve seen new cases on how you do, or rather don't, put weight on the question of mutuality of obligation - are people obliged to accept particular engagements and how much weight you put on that. We've seen cases on questions around the framework of control and the weight that's being put on the fact that even if you're not actually exercising control over people day-to-day there is a sort of framework of your ability to do that as a kind of an organisation. We've seen cases on how much weight should be given to factors that are perhaps more personal to the individual and whether they're truly in business on their own account and all of these things have somewhat changed the landscape, I think, really, in terms of how you might make a determination and we are seeing a number of clients who have been doing reassessments and they are landing somewhere different in a number of cases to where they originally did. So I do think, to go to the point you just made, that is actually quite a key thing that can be done to protect your position. It’s not something anyone particularly wants to do, it’s not anyone's favourite exercise, but equally we do know HMRC would absolutely expect it to be revisited quite regularly just to make sure that's done.”
Joe Glavina: “Any other advice you’re giving to clients on this issue, Chris?”
Chris Thomas: “The other issue that we that we are seeing is the question of whether the policies that organisations might have adopted 18 months ago are still fit for purpose now around off-payroll working. You might have taken the view that you're just going to say no to personal service companies but, perhaps, given where we are with the labour market and shortages, you might find that's coming under pressure because you can't recruit key people or because the business is taking a different line. If that is the case and you've got cases that are going under the radar, or maybe the policy is not being properly followed, that creates the risk, I think, that exceptions are being made, perhaps, which aren't then being properly risk assessed and you're not following the right process and, perhaps, not coming to the correct answer. So I think, again, this is sort of an opportunity to take a step back, make sure all parts of the business and all the relevant managers who were involved in this properly understand what the issues and risks are. Perhaps they might need up to date guidance on applying the relevant status factors given there have been some changes, as we said a minute ago, and does the policy actually need tweaking? Is it meeting the requirements now? Is it fit for purpose because we know one of the things that HMRC will always look at, we've seen this from experience with their compliance reviews, they are very fixated on process – is there a proper process and is that process being followed? So not only is that important for making sure that you’re doing it right but it is also absolutely something that HMRC will expect to see as well. So, yes, I would say that's something that is definitely worth revisiting.”
Penny Simmons article on this for Out-Law gives her view on this and comments more widely on the government’s response and the reasons behind it. That’s ‘Not right time’ for alignment of UK employment status law for rights and tax’ and is available from the Out-Law website. We’ve also put a link to it in the transcript of this programme.
- Link to government’s response to its consultation on employment status
- Link to Out-Law article: ‘Not right time’ for alignment of UK employment status law for rights and tax’