Steve Wade explains why there are difficult decisions ahead on the route to a straightforward tax system.
In its call for evidence on the tax administration framework, the government’s vision is for “a fully digital tax system able to support all the needs of taxpayers” and for the “majority of business, tax should be straightforward and hard to get wrong”.
Unfortunately, the current tax system is many years away from these admirable goals. Will 10 years be long enough to achieve the government’s aims? Can these aims be achieved without fundamentally changing the taxation of work?
Employment status – the current rules
The number of cases going through the courts is a symptom of the complexity of the tax system and of the tests set out in Ready Mixed Concrete  2 QB 497 – but the words ‘servant’ and ‘master’ do not fit with modern sensibilities and the focus on equality, diversity, inclusion, wellness and flexibility.
Mummery J in Hall (HM Inspector of Taxes) v Lorimer  BTC 424 is often quoted to explain that to determine employment status it is not a matter of ticking boxes, but of standing back, painting a picture and evaluating: “the overall effect of the detail, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another.”
Vinelott J in Walls v Sinnett  BTC 206 agreed and said it was: “quite impossible in a field where a very large number of factors have to be weighed to gain any real assistance by looking at the facts of another case and comparing them one by one to see what facts are common, what are different and what particular weight is given by another tribunal to the common facts”.
If the details vary in importance, and looking at other cases may not be of assistance, how can you administer the system by computer? Our current law appears as if it were designed to be the exact opposite of fully digital, straightforward and hard to get wrong. It is, therefore, not surprising that HMRC’s check employment status for tax (CEST) tool is ‘unable to make a determination’ in approximately 20% of cases.
These rules are complicated enough, but CEST doesn’t cover employment law, where we have not two but three statuses.
The House of Commons Library’s insight paper on the Uber case explains that: “Most employment law uses the definition of employment status set out in section 230 of the Employment Rights Act 1996. This creates three categories of people:
- ‘employees’ who work under a contract of service;
- ‘workers’ who are self-employed but provide their services as part of a business carried out by someone else; and
- ‘self-employed’ who carry out business in their own account and contract with clients.
Employees have the full range of employment rights. Workers have a limited set of rights, like the National Minimum Wage and holiday pay. The self-employed have no employment rights.
Trade union law and equality law use slightly different definitions. Tax law only has two categories: ‘employee’ and ‘self-employed’.”
An obvious question is: do we need all these different definitions? Would we need the off-payroll working rules for tax if workers were subject to an engager charge?
The question of employment rights is not new, but has been tested by the gig economy. The December 2015 Employment Status Review by BEIS was not optimistic about reform, concluding: “There are a number of options presented but most are highly complicated, would take years to deliver and could create new issues of their own.” On changing the presumption of employment rights so that an individual receives them unless another employment status is proved, the document observed: “While this would certainly be a ‘game changer’, it would take many years to develop and implement and even then, is unlikely to solve all the issues identified”.
The missing Bill
The Employment Bill, which was included in the 2019 Queen’s Speech but not taken forward, was widely expected to be included in the 2021 Queen’s Speech, but was not mentioned.
The House of Commons Library research briefing for this Bill said: “Subject to consultation, the Bill will make flexible working the default unless employers have good reason not to”. So much for master and servant.
The briefing also said the government would ensure “fairness by protecting the majority of businesses who strive to do the right thing by their workers from being undercut by the small minority who seek to avoid their responsibilities”.
Establishing a new single enforcement body for employment rights
In June 2021, the government published its response to the consultation, Establishing a New Single Enforcement Body for Employment Rights. It concluded that “74% of respondents did not think the current system was effective”, but only “55% thought a new body would be more effective”. One area the new body will cover is “umbrella companies, which employ and handle payment for agency workers but do not currently fall within the remit of the Employment Agency Standards Inspectorate”.
This new body could be busy because one response of some businesses to the extension of the off-payroll working rules to the private sector in April 2021 has been to stop engaging with personal service companies (PSCs) and to engage only via umbrellas. This has prompted HMRC to issue a warning about mini umbrella fraud.
The real issue
The 2018 HMRC consultation Off-payroll Working in the Private Sector stated: “There is evidence that this legislation is not working effectively, and non compliance is widespread. HMRC estimates that only 10% of PSCs that should apply the legislation actually do so. This is unfair: two people doing the same job, in the same way, can end up paying very different levels of tax, depending on how they are engaged.”
The different levels of tax and the employment rights are the main issues and need to be resolved simultaneously. We need to stop increasing the complexity of the legislation.
Tax rises are not popular
A cynical view of a good tax policy is that it is one that taxes other people. In his Spring 2017 Budget speech, Philip Hammond said: “People should have choices about how they work, but those choices should not be driven primarily by differences in tax treatment.” And, referring to Matthew Taylor and Good Work: the Taylor Review of Modern Working Practices: “He is clear that differences in tax treatment are a key driver behind the trends we are observing – a conclusion shared by the IFS and the Resolution Foundation.”
Despite this clarity and the observation that the NIC difference between the self-employed and the employed was “not fair to the 85% of workers who are employees”, a 1% rise in Class 4 NIC to be followed by a second 1% rise was met with a concerted campaign to stop the rises, with the Sun newspaper announcing victory on 16 March 2017: “Philip Hammond today grovels to Sun readers after scrapping his hated tax grab — to the delight of our army of White Van drivers.”
Given this background, one can imagine advice to ministers would be: “I wouldn’t start from here”, or as Sir Humphrey might say: “A brave decision, Minister”. Unfortunately, if we are to have a tax system that is straightforward and hard to get wrong, difficult decisions have to be made – or else HMRC’s and the new enforcement agency’s computers will agree that they are ‘unable to make a determination’.
- simultaneous reviews of:
- employment rights and employment status; and
- the difference in taxation of the employed and self-employed;
- all legislative consultations to include how the intended policies will be administered by computer; and
- no more HMRC staff cuts until after computerisation has been seen to work for taxpayers, agents and HMRC.
Now may be the time for change. When introducing the Self-Employment Income Support Scheme, Chancellor of the Exchequer Rishi Sunak said: “I must be honest and point out that in devising this scheme – in response to many calls for support – it is now much harder to justify the inconsistent contributions between people of different employment statuses.
If we all want to benefit equally from state support, we must all pay in equally in future.”
About the author
Steve Wade, Associate Partner, EY, and Chairman of the Tax Faculty’s Employment Taxes and NIC Committee
- TAXguide 17/21 Off-payroll working: cross-border issues
- TAXguide 16/21 Off-payroll working: trusts as clients: ‘small’ and ‘UK connection’
- TAXguide 15/21 Off-payroll working: Are you a 'small' private sector client?
- TAXguide 14/21 Income tax loss carry back
- TAXguide 13/21 Capital allowances: super deduction and 50% special rate allowance