Employment status problems can’t be solved by a statutory test, or a third way such as a new freelancer limited company. The underlying tax disparity between employment and self-employment that causes all the problems can only be solved by merging income tax and National Insurance Contributions (NICs).
The Office of Tax Simplification’s Employment Status Review is an excellent piece of work. It highlights that countries with closely aligned tax rates for the employed and self-employed just don’t suffer the same problems over employment status that the UK seems to. Presumably because it matters much less to the local taxman, who gets pretty much the same regardless.
One of OTS’s leading recommendations is to merge income tax and NICs. But this is not the first time the OTS has made that recommendation. Politicians have failed to grasp this particularly nasty nettle because if they do, then the electorate will finally find out quite how much tax they have all been paying.
But surely, as the OTS and a Bank of England report have shown empirically that the changes to the UK labour force are structural and won’ be going away, now is the time for the government to be honest and transparent? Better that than perpetuating the con that NI is not really a tax funding public services in the same way that income tax does.
It is also this disparity of tax that means employment status in the UK is not a choice. The OTS has quite clearly stated that, in fact, employment status is not a choice by the parties involved, absurd as this may seem. Employment status is to be determined by the factors relating to the engagement, and not what the worker and engager want it to be.
If employment status were a choice, then the problem would largely go away. But once again we return to this disparity of taxation that means HMRC feels obliged to place as many workers as it can in the ‘employed’ bracket to drive up both tax yield and uncertainty for all those involved.
The alternatives to an income tax NIC merger won’t work, and the OTS pretty much admits as much, when you read between the lines. A statutory employment test is the front runner as the least of all the evils. But to work, it will need to be transparent and binding. HMRC does not have a great record on either count.
Without this transparency and binding nature, we’re back to the situation with the existing Employment Status Indicator (ESI), which is neither trusted nor much used. The test would also need to be simple so that ‘normal’ people could use it. But that runs the risk of it being too draconian and capturing too many genuine self-employed workers.
The ‘third way’, creating some form of middle ground between the employed and self-employed, with a structure such as a freelancer limited company for this category of worker to trade through is a non-starter. It just adds more complexity to what is supposed to be a simplification exercise, and also brings us squarely back to IR35.
So, that leaves us with two options. We can maintain the messy, expensive and uncertain status quo. Or a government with some backbone can overhaul not just income tax and NICs, but the unholy mess that our tax system has become. Sadly, I think I know which option we will find was chosen by default, whichever type of government we see after May’s General Election.