A consistent focus of UK Governments stretching back to, materially, Roman times has been an avowed desire to ‘clamp down on false self employment’. Last week the Social Security Advisory Committee released a report identifying this as a phenomenon which:
occurs where employers (re)define their employees as being self-employed, which would not be appropriate if they effectively work for the ‘employer’.
This followed hot on the heels of the Consultation Document on the Onshore Employment Intermediaries provisions (“OEI”) in the Finance Act 2014. In his foreword, David Gauke, then Exchequer Secretary to the Treasury, said:
1.5 There are many legitimate reasons why a worker is engaged on a self-employed basis. The Government strongly supports enterprise and welcomes the contribution these entrepreneurs make to the economy. They recognise the additional financial risks someone who is genuinely self-employed takes and believe this should be recognised in the tax system.
1.6. However, there are times when someone who should be an employee is engaged on a self-employed basis. There are a number of benefits of engaging someone on a self-employed basis to the engager. The engager does not have to pay 13.8 per cent employer NICs and has none of the other costs associated with being an employer, including those associated with employment rights such as pensions contributions, redundancy pay and sick pay. The worker may benefit from a small increase in pay in the short term but this is at the expense of longer term benefits and protections such as employment rights.
And in 2009 the last Labour Government consulted on proposals which described the problem thus:
1.2 False self-employment occurs where workers are treated as self-employed for income tax and National Insurance (NICs) despite the fact that the way in which the work is carried out on a day to day basis demonstrates that there is an employment relationship.
And this Labour opposition has pledged, should it regain government in 2015, to introduce proposals similar to those it consulted on in 2009. And it’s not exactly as if the current legislative code ignores the issue. The Income Tax (Earnings and Pensions) Act 2003 contains (in addition to the Agency rules revised in the Finance Act 2014) so-called ‘IR35’ provisions and ‘Managed service company’ provisions.
Because the line separating employment and self-employment is “blurred and shorn of logic and economic principle“; because the difference in tax rates (for those who recognise a rose by other names) is huge; and because there is fiscal advantage for both workers and engagers (to adopt two neutral expressions) in classing workers as self-employed, there is every incentive to arrange matters so that that which might be the one is taxed as the other.
Even so. That one might need (presently) three – and with a contemplated fourth – sets of statutory provisions to tackle a single issue might cause even us benighted professionals plying our trades in the field of tax to raise a wearied eye. How has this come about? And does the contemplated fourth provide reason to cast off the pessimism of experience?
An informed walk through the story above reveals three discrete but related issues.
First, there is a remarkable lack of clarity about the problem. None of the papers referred to above define (or define better than the quoted paragraphs) what false self employment is. Now, it is undoubtedly true that there are some workers who are wrongly treated for tax purposes by their engagers as self-employed when they are employed. But that is not a problem that requires legislative solution: the Tax Tribunal is perfectly able to address it without recourse to any of the provisions set out above. All the Tribunal need do is ask whether the worker is employed or self-employed.
The real problem (in this context) with the Tax Tribunal – as we know but do not say – is that the assessment of a worker as employed or self-employed is a fact rich one. In consequence, it is usually disproportionately (compared with the value of the arbitrage) resource intensive for HMRC to tackle the question worker by worker. The legislative solution that is offered is to substitute a less fact rich assessment. But this is, of course, a solution to a different problem (resourcing rather than wrongly characterisation). And these solutions create a different issue: that of false employment.
Take the on-shore intermediaries provisions, for example. They eschew the multi-factorial assessment of the Tax Tribunal for a focus on a single question, that of supervision, direction or control. Fail this and you’re deemed to be – and taxed as – an employee. Even if, having regard to all the relevant features, you would be deemed to be self-employed.
Second, there is, as I have stated above, a lack of clarity about the reasons for the difference in tax treatment between these categories of employed and self-employed. None of the papers cited advance beyond David Gauke’s rather imprecise observation about ‘risk-taking’. The tax code pays no mind to the differences between dynamic and steady state businesses; between those where capital is and capital is not being risked; and between those who do and do not employ. It has no regard at all to the huge value for the economy as a whole of having a flexible labour market. It’s a difference likely without any – and certainly without any articulated – rationale.
What the papers referred to above also reveal is a (largely unspoken) frustration with the fact that it is often possible to toggle the tax status of a worker through adjustments to the drafting of his or her contract. That workers in economically similar situations might be taxed so differently (with distortive effects on the ability of engagers to compete on price) might seem surprising. But it is a natural – indeed, it is an inevitable – consequence of the fact that the relationship of employment – and hence the incidence of taxation – is a function of contractual terms.
Third, there is an apparent lack of understanding about how the problem should in practice be tackled.
The OEI provisions contain an excellent example of such a short-coming. It’s all very well creating a liability to tax on a person. But this is meaningless unless you can in practice collect it. These provisions (immaterial exceptions aside) put the liability on a third party – neither the engager nor the worker. And they create a situation where both engager and worker are largely indifferent to whether that third party meets its liability. We – taxpayers at large – have long and bitter experience of such circumstances. The practical reality is that the third party too – invariably a barely capitalised corporate – will itself be indifferent as to its liability. Its owners will remove its income, let the corporate fail, and then (in a practice known as ‘phoenixing’) simply create another corporate.
Let me look at these issues in turn.
If one was honest about the real problem one was seeking to tackle – the problem shared by both HMRC and engagers of how to form a secure view of status – one might then more readily move to a sensible discussion of what fit-for-purpose legislative solutions looked like. But so long we pretend that the problem is otherwise, we remain handicapped in our ability to tackle it.
If we were clearer about the behaviour we wished to encourage through the differential in the rates between employment and self-employment we could more readily tax to encourage or reward that behaviour. At the moment it is difficult to discern a rationale beyond discouraging the contractual status of employment. And this – to me at least – feels like no rationale at all.
What is it that we really wish to encourage – surely it is not everything that is not employment? Might it be businesses that risk capital? Is it those that employ others? Is it businesses that seek to grow – as opposed to those that seek merely to remain in a steady state? Is it those who are prepared to commit to short term contracts to provide supply chain flexibility for their clients?
Legislators, compelled to avert their eyes from such considerations, are left to tinker about with aspects of the contractual definition of employment. This impedes their ability fiscally to grease the right economic cogs. Indeed, I would go further. It is – in my opinion – very likely but quite inadvertently to have the effect of removing fiscal incentives from behaviour that, clear-sighted, we would undoubtedly wish to encourage in our economy.
And as to the third? Beats me. If you have the answer, do let me know. Certainly shooting from the hip at politically expedient targets can dis-incentivise business from engaging in developing workable solutions.
I should note, finally, that I will return to consider the role of intermediaries in the labour market in more detail in a later post. For now it is enough for me to note that they are a feature of this landscape but not one that alters the analysis set out above.