There has been a steady stream of high profile cases about employment rights and the boundaries between categories of employment and self-employment in the modern economy, with particular focus on tech platforms providers like Uber.
Largely (but not exclusively), the trend has been that those working in the gig economy have been found to be workers, rather than employees or people running their own micro businesses.
Workers have statutory rights including national minimum/living wage and the right to paid holiday. Trade unions can also seek to bargain collectively with employers on behalf of workers. Employees have further rights, including redundancy payments, maternity rights and unfair dismissal protection.
Ostensibly, the main driver has been concern towards “bogus self-employment”. There is however another equally important driver against so-called “bogus self-employment” which has received less public focus, namely tax.
The off-payroll working rules (known as IR35) were introduced in 2000, largely in response to the proliferation of freelancers in the IT sector. These rules are supposed to ensure that someone working like an employee, but through a company, pays similar taxes to employees.
Over 300,000 people in the UK work as self-employed consultants through their own personal service companies.
At present, where consultants perform work of this kind for private sector end users, if HMRC decides that the nature of the work being carried out is akin to employment, the consultant’s own personal service company is liable for income tax and National Insurance Contributions.
Since April 2017, there has been a new system where the end user of the services is in the public sector:
- The end user has to declare whether the nature of the work being carried out means that, if the contract had been directly between the end user and the consultant, the consultant would be regarded for tax purposes as an employee. This is deemed employment.
- If the work is deemed employment, the organisation paying the personal service company, rather than the personal service company itself, is liable for income tax and National Insurance Contributions.
- The 5% deduction for “notional expenses” is no longer be available to intermediaries.
This year, the government carried out a consultation regarding off payroll working in the private sector. Although the government has not yet replied to the consultation responses received, there are clear pointers in the consultation documents produced by the government as to the likely endpoint. HMRC claim that:
- currently income tax and national insurance is only paid in 10% of cases where it would deem the work being carried out to be employment;
- that this is leading to a loss of tax revenue in the private sector which will reach £1.2 billion a year by 2022.
- The 2017 changes to the public sector have led to HMRC collecting an additional £410 million in income tax and National Insurance Contributions.
It is safe to say that the government’s preferred outcome would be to roll out the 2017 public sector changes to the private sector.
Unsurprisingly, there has been a significant pushback from the tech, accountancy and other sectors likely to be impacted, arguing that there should be further consultation and that the changes should not be implemented before April 2020 in any event. The latter point shows that these industry bodies clearly recognise the writing on the wall and the real battle is going to be when, not if, these changes come into effect. While well-paid tech consultants could argue they do not want or require the same protections as low skilled gig economy drivers and couriers, this is not going to deflect the HMRC from collecting tax which it deems to be due.
The prevailing opinion is that the changes will not be introduced in April 2019 but it is still a possibility. Clearly, there also is a high probability of significant political and economic change in the UK in the next two tax years, however, whatever the developments in the UK between now and 2020, the demand for tax revenue is unlikely to reduce so it is difficult to see these changes not being brought into effect.
For that reason, businesses and self- employed consultants are wise to prepare in advance by reviewing their contracts and actual working arrangements. Both parties will need to consider the risks and benefits of employed and self-employed status for tax purposes. Businesses utilising consultants will need to know whether there will still be a big enough pool of available consultants for their needs.
For consultants facing losing the tax benefits of self-employment, the attractions and protections of working as an employee might now outweigh the loss of flexibility this entails. Although the change does not in itself affect statutory employment rights available to the consultant, deemed employee employment status for tax purposes is likely to be indicative that the individual is at least a worker, with the corresponding statutory rights, and possible even an employee.