The Taylor Review on Modern Working Practices (the review) was published on 11 July 2017 after ten months of consultation. Set up to look at how employment practices need to adapt to modern working patterns, it was prompted by the growth in agency working and the gig economy. According to the review there are an estimated 800,000 to 1.2 million people in agency work, and some 1.3 million working in the gig economy.
Specific tax proposals were outside the scope of the review, but it did identify the following tax issues:
- While tax law recognises someone as either employed or self-employed, employment law allows for a third category, the worker, who only receives basic employment rights. The review considers the different classifications in employment and tax law cause confusion.
- Determining the correct classification between employment and self-employment is not straightforward for employment or tax law, and too much court time is spent dealing with status cases.
- The cost of National Insurance Contributions (NIC) has a big impact on hiring decisions. The desire for lower tax bills can lead to bogus claims for self-employment by both workers and engagers seeking to minimise their tax costs. Individuals can experience pressure from potential engagers to class themselves as self-employed. Finally NIC costs put those businesses that choose to employ staff at a competitive disadvantage to those who engage self-employed individuals.
- The hidden economy is thought by HMRC to contribute 18% of the estimated tax gap of £6.2bn in 2013/14.
The review also emphasised the importance of training to allow individuals to develop and progress, but observed that employer-funded training is declining and that many self-employed people said they were unable or unwilling to pay for training.
The review proposed:
- A new category of worker for employment law purposes called the dependent contractor. Targeting the gig economy, the dependent contractor would be someone who works flexibly in less formal employment with a more basic package of rights than a normal employee. Their rights would include payment of the appropriate minimum wage, holiday pay and sick pay. The review didn’t conclude which rights wouldn’t apply.
- Better employment legislation (primary and secondary) to draw a clear line between the worker and the self-employed individual. The aim would be to reduce the risk of exploitation, particularly of lower-paid individuals, and reduce the need to challenge status in court as occurred in recent cases including Uber and Pimlico Plumbers.
- Better alignment of tax and employment law to avoid confusion.
- The review also proposes that the burden of proving an individual is not an employee or worker, but is in fact self-employed, should fall on the engager.
- Tackling the tax incentives to be self-employed when this is not the true nature of the engagement and, in the longer term, aiming to equalise the tax costs so someone’s labour is taxed the same whether they provide it as an employee or via self-employment.
- Moving to a cashless society by encouraging people to make payments to self-employed individuals digitally via HMRC accredited platforms.
ATT Initial Comments
ATT welcomes the further contribution to debate in this area, particularly in respect of the difficulties of having two classifications for tax law (employed or self-employed), but three in employment law (which includes worker). We will be following that debate closely and would be very pleased to receive ideas from members – please contact atttechnical [at] att.org.uk (subject: The%20Taylor%20Review) using the subject heading The Taylor Review. What follows are some initial comments.
The proposed dependent contractor status, which would replace worker, still leaves the tax system trying to fit three into two. To solve this the review proposes that a dependent contractor would be taxed as an employee, despite having fewer employment rights. This is likely to create NIC costs for many employers in the gig economy and increase NIC rates paid by workers, which will presumably be unpopular.
One alternative would be to introduce a matching third tier in the tax system for dependent contractors, which would then allow different NIC rates to apply. While this may reflect the reduced benefits dependent contractors receive - and/or reduce the impact of employers’ NIC costs for companies operating in the gig economy -it would go against the review’s recommendation that labour should be taxed more equally, independent of the status of the labourer.
The review called the significant difference in employee and self-employed NIC rates a perverse incentive driving bogus self-employment. The ATT would like to see a broader discussion here factoring in the wider tax aspects. There are lots of other areas that could be usefully brought into discussion to produce a framework for modern working including:
- The potential for simplification by aligning Income Tax and National Insurance as recommended by the OTS
- Considering those working via agencies and personal services companies
- Factoring in other taxes to look at the overall contribution for Income Tax, NIC and Corporation Tax where personal service companies are involved.
Where possible it would make sense if the same status tests could be applied in the same manner for both employment law and tax law. Clearer legislation and tests to make the dividing line between worker and self-employment would be beneficial, although sometimes creating clear cut offs in legislation can have unintended consequences. For example, where the review discussed that some employment rights should apply after a fixed period, protections may well be needed to avoid contract manipulation preventing key milestones from being reached.
To encourage more people to undertake training, one approach might be to allow tax relief for training costs in a wider variety of cases. The self-employed, for example, cannot claim tax relief for acquiring new skills, only for the cost of updating existing skills. For an employee, where their employer pays for, or reimburses, a work related training cost, there is no taxable benefit for the employee and the employer receives tax relief for the costs incurred. But where an employee opts to undertake further training to enhance their skills and this is not reimbursed or paid for by the employer, even if relevant to their work, the employee must pay for this out of their taxed income. Potentially the tax system could be used to incentivise training by widening opportunities to obtain tax relief for costs incurred.
The proposals for a cash less society have the potential to sit with the (deferred) introduction of Making Tax Digital (MTD). However, as with MTD, there would need to be protections for the digitally excluded.