It is now seventeen years since the legislative changes announced in IR35 came into force. At the time of its implementation, Gordon Brown, then Chancellor, announced that the legislation would counter tax avoidance carried out through the use of personal service companies.
The recent release of the Taylor Report on employment status, shows this has not been entirely successful, whilst the rise of the, so-called, gig economy further complicates matters.
Regardless of the outcome of the Taylor Report, this matter is more relevant than ever. The direction of travel is clear, the government wishes to align the taxation of both the employed and self-employed to prevent erosion of the tax base.
In respect of employment status, tax law generally follows employment law – which is particularly relevant when you consider the recent rulings, such as in the Uber case (currently being appealed).
Subtle changes were introduced in 6 April 2016 to begin to align deductible expenses between the employed and self-employed.
Off-payroll working legislation has also been introduced to curb the use of contractors by the state. It is possible that this reflects a move by the Government to “clean house” as a prelude to a wider onslaught against contractors.
It is inevitable that further developments can be expected as the gig economy continues to grow and the Revenue struggles to apply a century old system of taxation to a rapidly changing workforce.
In this series of articles we therefore take the opportunity to review the history, financial implications and future of this area of tax. We will provide a general background and briefly consider the effects of employed or self-employed status in relation to National Insurance Contributions (NIC).
History
Employment status has been an area of contention since the late nineties, when many individuals started operating as self-employed contractors through Limited Companies, Partnerships or even as Sole Traders.
Consequently HMRC (then the Inland Revenue) issued what is commonly known as IR35. Rather than an individual piece of legislation this is actually the bulletin that announced the intention to implement the legislative change.
Where the worker personally performs services for a client through an intermediary (rather than being directly employed by that client) the effect of the legislation taxes the individual as though they were employed.. However, this only applies where the worker would be regarded as an employee if the services were provided directly between the worker and the client if it weren’t for the existence of an intermediary company.
We will discuss the indicators of employment in a future article as well as further legislative changes which have occurred since the heady days of 2000 when the legislation was first introduced.
However, the problem now remains one of determining whether the worker would be treated as employed.
How is employment status determined?
The prevailing trend is, in some quarters, to view an individual’s employment status as a matter of choice – this is not in fact the case.
There is no legislative definition of an employment. Although it is likely that this is quite deliberate as a consequence of any legislative definition because in defining what something is, it also defines what it is not.
By providing a stated definition in legislation, the government would therefore risk providing a means of allowing individuals to effectively elect to choose to be employed or self-employed by adhering to the written rules.
Why does it matter?
Historically the rights of the employed and self-employed differed considerably, in consequence different rates of NIC applied. Over time, the rights of the two and entitlement to state benefits have converged.
Recently there has been much talk of a move to reduce the discrepancy in the NIC suffered by the employed and self-employed. Although Phillip Hammond’s recent attempt to increase Class 4 NIC (paid by self-employed sole traders and members of partnerships) led to an embarrassing u-turn.
Again, the Taylor Report has suggested that this should be revised.
We will consider the implications of the different structures through which a worker’s services could be provided, together with income tax, in a subsequent article. But for now we will consider the NIC differences applicable to an individual engaged by a limited company as an employee and as a self-employed sole trader.
Consider two employees, one earning £45,000 and the other £100,000, the NIC suffered will be as follows:
| Salary | Employee (class 1 primary NIC) | Employer (class 1 secondary NIC) | Total |
| £45,000 | £4366.32 | £5021.27 | £9387.59 |
| £100,000 | £5466.32 | £12,611.27 | £18,077.59 |
Now consider two individuals engaged to contract to a company as sole traders, one earning £45,000 and the other £100,000, the NIC suffered will be as follows:
| Salary | Self-employed worker (class 4 NIC) | Engaging Company (no NIC) | Total |
| £45,000 | £3274.74 | £0.00 | £3274.74 |
| £100,000 | £4374.74 | £0.00 | £4364.74 |
From the above it can be seen that an overall reduction in NIC of between 65 and 75% has occurred owing to the change in relationship between the worker and the client. The difference may be even more pronounced where the engagement is undertaken via a limited company.
Moralising aside, in view of the above differences there is a recurrent concern that organisations and individuals could seek to obtain a fiscal advantage by misrepresenting the nature of employees’ engagements.
Over the coming articles in the series we will consider how employment status is determined, the implications of different engagement structures and current and proposed legislative changes to curb perceived avoidance.
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