It will be impossible for the Office of Tax Simplification (OTS) to devise a simple, objective statutory employment test as an outcome of its Employment Status Review. That’s because the rules that define the continuum between being employed and being not-employed cannot be used to define the two unique sets and states of being – employment and self-employment.
IR35 has tried to apply employment legislation case law to determine employment status for tax purposes and has failed. The business entity tests (BETs) tried to apply binary tests to employment status and "being in business" and failed. The OTS cannot make the same mistake by proposing a statutory test as an outcome of its review.
The solution is to allow freedom to contract, allowing workers and engagers to decide on status by the contract they choose. The only doubt in employment status is when HMRC is given the powers to challenge contracts and the intentions of the worker and engager, with laws such as IR35 and constructs such as the BETs that have failed to work.
In the same way that going from night through the dawn to daylight includes two extremes of night and day, with shades of grey in between, employment status is a continuum between two extremes. There are workers who are quite clearly employees. There are those who are without doubt self-employed and in business on their own account.
And in between there is a huge grey area of workers who show some of the characteristics of an employee and some of the characteristics of the self-employed.
How can a simple binary test possibly correctly categorise this grey area in such a way as to reflect the intentions of the parties and also meet the needs of defining employment status for the purposes of employment law and tax law?
There is no simple test that can do this. In fact, any attempt to do so would be mathematically flawed. The mathematical rules that are used to define a spectrum, which is this continuum between employment and self-employment, cannot be used to define two unique sets, which represent the ideal employee and self-employee.
Let’s look at it another way. You want your doctor to categorically confirm whether you are unwell or well. You undergo a huge battery of tests and the results – your wellness - are plotted on a graph that goes from being ‘extremely healthy’ to ‘extremely unhealthy’.
Everything on the line in-between the two extremes is a relative state of unhealthy and healthy. But if you then choose only those tests that give you a binary solution, so that when you take them you are either healthy or unhealthy, this is clearly not the reality of your health.
You can’t assume that if you are not in the extremely healthy category then you are automatically in the extremely unhealthy category, or vice versa. This is what the BETs attempted to do.
Currently, we use employment legislation case law to define employment status both for the purposes of employment law and tax law. This case law has been defined over decades and represents the efforts of some of our legal system’s greatest talent.
Case law is very subjective and these ‘rules’ define a spectrum of employment to self-employment. How often do we read in IR35 and other employment status related rulings the judge say ‘on the balance of….’, indicating that there is no black and white answer.
You can’t just pick out the bits of the employment case law that you like and that gives you a binary solution with a neat boundary between employment and self-employment. It is just not possible.
If you want to go down the simple, objective, statutory employment test route, you need to tear up the existing rule book and start again with a new set of rules. But if these new rules are different from case law, then these rules may not necessarily reflect reality, because that’s what case law does - it reflect reality, and any newly invented tests that meet some sort of binary requirement won't align with reality.
We need to keep the existing employment legislation case law for the employment tribunals that determine employment status for the purpose of employment rights, because it works.
But as IR35 has demonstrated, using employment legislation case law to determine employment status for the purposes of tax does not work. And neither does ‘Cherry-picking’ binary tests to meet an agenda does not work, as the BETs demonstrate.
Workers and engagers, the self-employed and their clients, need the freedom to contract according to their intentions and certainty that HMRC will honour it. The only uncertainty in employment status for tax purposes is when HMRC tries to override the parties’ intentions.
And if the Exchequer decides there is too much of a disparity between the taxation of the employed versus the self-employed, then it should change the tax system, merging income tax with National Insurance Contributions (NICs).