In partnership with Bloomberg BNA five leading CIOT members have written analyses of the measures in Autumn Budget 2017. This article by Susan Ball of Crowe Clark Whitehill, a CIOT Council member, looks at the taxation of employment in relation to announcements in the Budget.
The Government’s first attempts to get to grips with the issue of ‘disguised employment’ extends back to the Finance Act in 2000, when then Chancellor Gordon Brown introduced ‘Intermediaries Legislation’, which soon became known as IR35.
Designed to clarify and address taxation issues on disguised employment in an increasingly flexible labour market, the legislation however has been beset by problems since its introduction. After much discussion, further public sector assurance rules were introduced in 2012, and new tax legislation for those working in the public sector came into effect in April 2017.
The prospect of the Government extending the IR35 changes to the private sector was hotly debated since the introduction to the public sector, with many at the time considering this to be a case of when – rather than if. This was further fuelled by comments made by government officials about levelling the taxation playing field for public and private sector contractors.
Therefore, today’s announcement that the Government has already commissioned research on extending the rules to the private sector is not a great surprise. It is likely that the research will be published in 2018, resulting in implementation from April 2019.
What this means in practice is that private sector companies will join public sector bodies in being responsible for deciding if limited company (LLP and other intermediary) contractors should be taxed in the same way as permanent employees (inside IR35) or as off-payroll staff (outside IR35).
It is estimated that off-payroll work currently costs the Exchequer an estimated £4 billion a year, and the Government will certainly continue its mission to tackle this issue. However, today’s announcement comes less than a year into the public sector changes, the introduction of which was affected by last minute legislative changes and delays to HMRC’s Employment Status Service (ESS) Tool.
Changes in this area could lead to a significant increase in labour costs and a major administrative headache for organisations which engage contractors. Extending this to the private sector could result in complications for the self-employed in the UK and see a move away from the use of intermediaries such as limited companies in favour of a straightforward self-employed arrangement, so it will be interesting to see the results of the consultation next year. In the meantime, it is advisable employers should start to prepare for legislation which now seems inevitable.
Given this impacts almost five million people or some 15% of the workforce, it is evident that clearer legislation on employment status could be valuable in preventing confusion and promoting fairness amongst businesses. Therefore, the announcement that the Government recognises that this is an important and complex area and that it will work with stakeholders before any final reforms are introduced is good news.
This is a rapidly developing area of law with potentially very costly implications for those employers that make the wrong decision. They could as a result be liable for tax and National Insurance Contributions (NIC) as well as interest and penalties from HMRC, in addition to Employment Tribunal claims for arrears of holiday pay and minimum wage.
Clearer statutory definitions would help workers and companies alike understand the distinction between employment statuses. On 20 November, we saw the House of Commons Work and Pensions and Business, Energy and Industrial Strategy Committees publish draft legislation as a framework for modern employment. The Bill proposes that ‘worker’ status would be the default legal position for those employed in the gig economy together with fines for firms that falsely classify workers as self-employed. This is an employment law status which is currently not recognised in the tax legislation further adding to the current confusion: we would urge the working parties to look carefully at the alignment of employment status for employment rights and tax purposes so that both businesses and those working in them have a better understanding of this and their resulting responsibilities.
With the self-employed already feeling under attack, thanks to changes to IR35, introduction of dividend taxes and an attempt to increase NIC, it is good that changes will be carefully considered. It is after all only the other week that the Government delayed the promised changes to Class 2 NIC in a move that will cost every self-employed person more.
After the dust settles on today’s Budget, it will remain to be seen how the extension of IR35 will play out among the nation’s self-employed.
Another area facing significant change is taxation of employee expenses. The Government will consult on extending the scope of tax relief currently available to employees and the self-employed for work-related training costs. This will be good news for many employees. The cost of training is increasing and many employers now expect employees to pay for it themselves. There are also welcome proposals to reduce the burden on employers who will no longer be required to check receipts when reimbursing employees for subsistence using HMRC benchmark scale rates, and for HMRC to work with external stakeholders to improve the guidance on employee expenses.
In summary, there are significant changes afoot in the area of employment taxation, but the pace of change is likely to be slow and deliberate, as the Government move forward cautiously and consultatively.
Susan Ball, National Head of Employers Advisory Services, Crowe Clark Whitehill, and a CIOT Council member
This article was first published by Bloomberg BNA as part of their Budget 2017 special report