Original content provided by BDO UK.
In 2018, the Department for Business, Energy and Industrial Strategy published a consultation on potential reform to employment status but we had to wait until 26 July 2022 for the government’s final response to submissions.
What is employment status?
Employment status describes the nature of the relationship between an individual and the person to whom services are provided. Surprisingly, there is still no statutory definition of ‘employment’, so each case must be considered on its facts and the principles set out in voluminous case law. An individual’s employment status governs the fundamental relationship between them and the business for which they work, including the rights of the individual, the taxes paid and the method in which they are collected.
Determining the correct employment status for an individual is complex, not least because for employment tax purposes there are two statuses: employed and self-employed; while for employment law purposes there are three: employed, self-employed and worker. Therefore, different statuses may apply for tax and employment law purposes (for example, a ‘worker’ may be treated as employed or self-employed for tax purposes).
Reasons to reform
The 2018 consultation followed the Taylor Report as part of the Good Work Plan 2018 and sought to explore whether some of the Taylor Report recommendations could be applied in a modern labour market to provide greater clarity for individuals and businesses - a challenging objective.
The report identified 3 key issues:
- ‘Open to interpretation’ – the current regime is based on case law and as such can lead to ambiguity in the way the relevant tests are applied.
- ‘Complexity’ – the world of work is constantly evolving and so it can be difficult to apply historic case law tests to present day situations
- ‘Difficulties resolving disputes’ – it can be difficult and expensive for all parties to resolve status disputes.
Respondents to the original consultation supported the idea of creating a statutory employment status test - although it was widely recognised that this would not be a straightforward to codify the current tests. The principal tests of employment status are generally recognised as being:
- Mutuality of obligation
- Control (over the worker)
- Personal service.
Sadly, there was no consensus amongst respondents on whether a new test combining these themes should be legislated for or covered by a non-legislative approach. Equally respondents generally agreed with the government's position that ‘self-employed’ and ‘employer’ should not be defined in legislation.
Although a small majority believed that employment status for tax should be aligned with that for employment rights, there was no consensus as to where the line should be drawn to achieve this, and the majority of trade unions and business representative groups did not support alignment.
In its formal response, the government’s stated that they ‘believe that our three-tiered employment status framework for rights provides the right balance for the UK Labour Market by allowing flexibility – for both employers and individuals - whilst ensuring workers in more casual employment relationships have core protections such as the minimum wage and the right to holiday pay.’
They referred to the previous government’s commitment to align employment status for tax and legal purposes as set out in the Good Work Plan 2018 and said that “for tax, the majority of status cases are simple and clear”. Those of us grappling with employment status issues on a daily basis would probably disagree!
Unfortunately, the lack of consensus on how to drive major reform, as well as the impact of the pandemic and current economic uncertainty, has enabled the government to reasonably conclude that ‘now is not the right time’ for reform. While it is obviously right only to do major surgery to our employment tax and rights laws when the business ‘patient’ can cope with it, one does wonder if there will ever be a right time for reform.
Impact for businesses
While reforms employment status may be in the ‘too difficult’ tray for many years yet, it does not mean that HMRC will be taking a ‘light touch’ on employment status issues. In fact, HMRC is ramping up enforcement activity as the 2021 off-payroll labour rules for private sector employers bed in.
So now, more than ever, it is important to get employment status right. If in any doubt, employers should consult a professional adviser specialising in employment status for tax to ensure that all workers are treated correctly for tax and NIC purposes and, separately, an employment lawyer on worker rights issues.
Further reading Employment Status consultation - Government Response.
If you have questions, please contact a member of our employment tax team (listed on the right).