OTS employment status review: key recommendations

A review of employment status by the Office of Tax Simplification has put forward 28 recommendations. The major recommendations are as follows:

There should be a joint review between the HMRC, HM Treasury, the Department for Work and Pensions and the Department for Business, Innovation and Skills which looks at the possibility of developing an agreed code of principles on employment status. In any event, there should be work carried out, preferably by a joint group, to develop better guidance for the average individual and small business of the rules on employment status

The term ‘office holder’ is outmoded and a source of confusion. Any distinction between this and ‘employment’ should be abolished in the tax legislation. This would apply to income tax and NICs. However, we have not heard of any real difficulties with the term in practice, so we would be interested in hearing from anyone who is experiencing particular problems with the operation of the ‘office holder’ concept or who has experience of unexpected results arising from its application

The overall recommendation from our international studies is that there are lessons from a number of other countries that can usefully be drawn on for the UK.

The idea of a set ‘de minimis’ level for payments to an individual who carries out some activities for a business, which would definitely not be an employment, should be explored. This might be in terms of time spent or payments made and could link to [a] withholding [of] tax [see this article’s recommendation 20] .

All of the government’s guidance material on employment status should be brought together in some form of ‘employment status portal’ covering both tax and employment rights.

HMRC should issue guidance on the types of documentation and actions they would expect to see a business take when engaging a self-employed individual (in effect, a document setting out ‘what good looks like.’

There is considerable merit in the idea of a ‘safe harbour’ basis that balances businesses’ need for certainty with the risk to HMRC:

We recommend that further work is carried out on the idea and how it might be developed,
The main aim would be that an HMRC employment status ruling could apply from the date of the ruling, but could not apply retrospectively.

HMRC should set up an employment status helpline, where businesses are able to discuss specific queries with an HMRC officer with specialist knowledge of the subject.

HMRC guidance should have more examples of common real life situations and show how employment status case law applies to them.

HMRC should consider allocating more resources to employment status and/or ensure that more HMRC employer compliance staff receive specialist training in this area.

We have seen the reports of the IR35 Forum and it would seem pertinent to explore if there is any synergy between the recommendations for IR35 purposes and those of the OTS under this employment status review.

The case law underpinning HMRC’s Employment Status Indicator tool (ESI) needs to be reviewed and updated, ideally in an open and transparent way, perhaps by establishing a working group.

We believe that the ESI is valuable and should be maintained and improved; we note [six] points [that should] contribute to HMRC’s current upgrade work.

Many businesses and representative bodies also indicated that if the ESI tool is properly and reasonably completed (a concept that would clearly need to be defined), then the results should be definitive. We recommend that this is explored in the context of our ‘safe harbour’ idea [see this article’s recommendation 7].

The statutory employment test is an idea that needs to be taken further. We recommend and have detailed a six-stage sequence of action.

The current HM Treasury review of travel expenses, following on from our own work, needs to be expanded to look at the position of the self-employed as well as employed.

There should be a full study into the alignment of tax and NICs payments and benefits across the employed and self-employed.

We reiterate the recommendations we made in our Small Business Review, that merging tax and national insurance would remove many of the anomalies within the tax system, and contribute significantly to simplifying issues around employment status by reducing the differentials.

Increase transparency around employers’ NIC and hence the understanding of the average individual of how much is being paid in what is, in effect, a payroll tax. That might provoke a better-informed debate on how best to reform the tax.

We consider that the concept of a wider withholding tax for payments to the non-employed should be explored. This would not be a simple expansion of the Construction Industry Scheme; instead it would be a new system that took advantage of digitization to establish a simple and responsive deduction system that translated easily into payments on account.

We do not recommend developing a new ‘third way’, i.e. an entirely new employment status in the tax system at this stage. Although the route has possibilities, there seem to be many difficulties in establishing it fairly and we think other routes have more potential. We do not rule out returning to the idea, especially if its proponents can address some of the issues we identify.

We suggest a full review of the taxation of small businesses, which could cover limited companies, partnerships/LLPs and sole traders, and would have regard to employee taxation.

Editor’s Note: Related Reading –

5th March, 2015