The time has come to face up to the fact that ‘perm-tractors' or, more accurately, disguised employees, should be more easily identified and taxed accordingly. Hopefully, the new Office of Tax Simplification will go some way towards doing so. But, as the experience of the UK and other countries shows, this will not be an easy task.
Economic growth is the solution to many woes, not least helping reduce the UK’s huge budget deficit. That entrepreneurs and people in business drive growth is not disputed. In return, they are rewarded handsomely for their contribution and their risk-taking by paying lower taxes than those who choose to be employed.
Many of the people who benefit in the UK are contractors running their own limited companies. Not only can genuine contractors access lower rates of income tax, but they also enable larger organisations to grow. These contractors do so by offering their services as a highly skilled and flexible workforce, providing the true engine that drives growth. And the UK takes the lead in Europe with its burgeoning contracting sector.
In fact, the European Union is all in favour of protecting such entrepreneurs and engines by applying the European Social Model, which is also known as ‘flexicurity’, to provide risk takers with a comfort blanket. Throughout EU countries, there is an evolving compact that says: ‘If you take risks, generate growth and jobs, improve economic prosperity for us all, then we’ll reward you with low taxes and social protections.’
However, there are those ‘contractors’ who appear to be in business but are in fact perm-tractors who want to have their cake and eat it. They expect to benefit from the favourable tax regime that comes from being a risk-taking business, but without the risks of generating growth or building a business. In other words, they’re not fulfilling their part of the bargain.
At a recent PCG event, which included many guest speakers from around the globe, it became clear that the UK is not alone in trying to tackle the problems of perm-tractors. Nations such as Canada and Australia have implemented laws to combat the perceived tax evasion that these workers represent. Just like IR35. And, as with IR35, the solutions are typically one-size-fits-all. They tend to be desperately unfair and typically fall foul of the law of unintended consequences.
In the UK, the coalition government has recognised this, which is why, in part, it is starting the new Office of Tax Simplification. The OTS had been tasked to consider alternatives to IR35 “and create certainty while ensuring that, where intermediaries are used to disguise employment, any income that is effectively employment income is taxed fairly”.
We can only hope that the “expertise from across the tax and legal professions, the business community and other interested parties” due to be invited to participate in the OTS’s activities will include representatives from the contracting sector. Hopefully, those representatives will heed the lessons of other nations’ unsuccessful attempts to legislate for disguised employment.
But whatever their success, those ‘perm-tractors’ who are effectively disguised employees – not true contractors – should expect to be taxed accordingly.