The world of work is going through a period of transformation. Advances in technology have enabled a significant increase in contract, freelance and temporary work, dubbed the “gig economy”, and boosted the number of self-employed.
Perspectives on the main drivers vary. Studies repeatedly indicate how important the flexibility of the gig economy is to millennials – and many older generations. In contrast, the UK Treasury is concerned that (at least some of) the rise in self-employment is driven by tax avoidance.
“We recognise the world of work is changing and we have to make sure we have the right structures in place to reflect those changes,” said UK prime minister Theresa May in February 2018, when the government published its response to the 2017 Taylor Review of modern working practices, plus four consultations on key areas of reform.
The government is promising new rights for “millions of flexible workers”. But the consultations highlight how challenging this will be and pose questions around inconsistencies between existing systems for employment law and tax and how they treat employees and the self-employed.
The number of self-employed in the UK labour market increased from 3.3 million people (12.0% of the labour force) in 2001 to 4.8 million (15.1% of the labour force) in 2017, according to the Office for National Statistics. A sizeable 45% of all UK employment growth since the 2008 financial crisis has been in self-employment, according to analysis of ONS (2008-2017) statistics by the Resolution Foundation – much of it in traditionally high-paid sectors such as banking and finance. The gig economy is increasing in size and diversity. Those doing temporary jobs and multiple short-term engagements are more likely to be skilled workers in IT and finance.
In 2016 the UK prime minister, Theresa May, commissioned an independent review, led by Matthew Taylor, chief executive of the RSA, to consider how employment practices need to change.
As originally commissioned, it did not include tax. But when Good Work: The Taylor Review of Modern Working Practices was published in July 2017, some of its 53 recommendations did affect tax. In February 2018 the UK government published Good Work: A response to the Taylor Review of Modern Working Practices outlining its plan for Taylor’s recommendations, along with four consultations on employment status, increasing transparency in the labour market, agency workers, and enforcement of employment rights.
The future of IR35
At the heart of both the employment law and tax systems lies employment status, and the consultation on this seems likely to bring more changes to IR35. Tinkering with it in 2017 brought “off-payroll working” reforms (see box), that shifted the responsibility for assessing IR35 status in the public sector to put the onus on those engaging workers.
“The government must consult widely before further reform is announced. An open dialogue with the people IR35 reform affects is essential,” says Seb Maley, CEO of specialist adviser Qdos Contractor. The four existing consultations close by 1 June 2018 and many are expecting private sector off-payroll reforms as early as 2019.
Although public sector off-payroll reforms increased IR35 compliance they also created problems for public sector bodies and workers. The NHS was not alone in attempting to manage its risk by putting all contractors (and locums) inside IR35; but it relented and offered case-by-case assessments when a walk-out loomed.
The affected self-employed have limited recourse. “There is technically no right of appeal on this,” says Liz Wilson, a senior associate with law firm Squire Patton Boggs. “Workers may try to argue their case with the pubic body engaging them, or they may potentially self-assess on the basis that they think the engager was wrong and then deal with the Revenue alone.”
Mirroring the public sector approach in the private sector would increase IR35 compliance but it would also bring disruption. Requiring every business in the UK to look at every other business it engages to work out whether there is any possibility of the IR35 rules applying will be complex.
“I think that a proposal by government for private private sector change is almost inevitable. Whether the results will be the same as in the public sector, I am not so sure,” says Anita Monteith, one of ICAEW’s technical tax managers. She expects fewer edicts that bring all workers onto the payroll. “The Good Work paper published by government in response to the Taylor Review will be just the start of a much bigger conversation about the future of work and how it is taxed.”
The four consultations examine various options, including new legislation, to make it easier for the workforce and businesses to understand if someone is an employee, worker or self-employed – and determine which rights and tax obligations apply to them.
“It’s a potpourri of tax, employment law and nice to have, but tax has been bolted on as an afterthought, because Taylor was told not to look at it,” says Monteith. “I hope we go beyond the consultation and have a fundamental look at costs and risk across this whole area.” This would need to include not just tax but National Insurance (NI).
“We need an informed national debate on what we want NI to be for, what we want it to be levied on, who should be paying it and how much. There are lots of inconsistencies in the NI framework,” says Monteith. “For example, employees can no longer be forced to retire, but if they do continue to work after reaching state retirement age, they do not have to pay employees’ NI.”
Wilson also favours less tweaking and a much broader and more fundamental debate. “There’s a huge appetite for change,” she says, noting how difficult it is to find clarity and consistency with the existing rules. “We need a consultation or study that ties together the rights of workers and tax and NI and looks properly at all of this, overarchingly.”
Technology could also change how rules on workers’ employment rights and taxation are administered. The UK government has invested millions in Making Tax Digital and in sophisticated data analysis tools – and more of what we do leaves an electronic footprint. All of that data is getting easier to capture and if every UK citizen had a unique identifier it would be easier to analyse too.
“We will probably get to a system one day where everybody will pay the right amount of tax and it won’t really matter what category they are in or how many different places they work,” says Wilson. “But that’s a long way off.”
IR35 in a nutshell
The IR35 tax avoidance legislation came into force through the Finance Act 2000 and has since found a home in the Income Tax (Earnings and Pensions) Act 2003.
IR35 applies where a worker provides their services to a client via an intermediary in circumstances where, without the interposition of that intermediary, the worker would “hypothetically” be considered an employee.
In April 2017 the IR35 regime was reformed for off-payroll engagements of workers who operate through intermediaries in the public sector. Roles and responsibilities for applying IR35 now differ, depending on whether a worker provides their services in the public or private sector.
In the private sector, responsibility for assessing IR35 status remains (as it has always been) with the “intermediary” (such as a worker’s own limited company or partnership). But this may change in the future, to bring the private sector in line with the public sector.
In the public sector, the responsibility for assessing the IR35 status of a worker is with the public authority, agency or other third party (who pays the worker’s intermediary) and they must deduct tax and NICs and pay, and report to HMRC for workers assessed as being within the IR35 rules.