In December 2018 the Government published its Good Work Plan, which sets out its vision for the future of the UK labour market and draws on many of the recommendations from the Taylor Review of Modern Working Practices, originally published in July 2017.
- Will the tax and employment rights rules for determining status be aligned?
- Will these be welcome changes?
- How does this affect the IR35 reforms proposed to take effect from 6 April 2020?
The Good Work Plan confirms that the Government will bring forward detailed proposals to address one of the biggest problems with the current rules for determining employment status; being the inconsistency of having a two-category system for tax purposes (where individuals are either employed or self-employed) and a three-category system for employment rights (where individuals are either employed, self-employed, or have ‘worker’ status).
As a result of the tax system not currently recognising worker status, it is possible for an individual with worker status under employment rights rules to have self-employed or employed status for tax purposes. This is extremely confusing and is an area which many engagers struggle to deal with.
The announcement to bring forward proposals to address this inconsistency is therefore welcome news, but it remains to be seen exactly how and when the tax rules will change given that the concept of worker status seems set to remain for employment rights purposes.
Will the tests for determining status change, and will the guidance and tools available for determining status be updated and improved?
The Good Work Plan confirms that the Government will legislate to clarify the current employment status tests which engagers must consider when deciding status. It also promises improved guidance to help engagers determine status.
It appears likely that these changes and improvements will include:
- placing less emphasis on the often hypothetical test of personal service (ie whether an individual can engage and send a substitute or helper to undertake the work) and more emphasis on the degree of control which can be exercised over the individual; and
- improved guidance and online tools to help engagers assess employment status more effectively.
The above changes have the potential to be both significant and welcome changes.
At present, however, the position remains uncertain as there is no further information or draft legislation which helps us understand exactly what will change and when. What is certain is that finding a solution which results in a simplified, aligned and improved system for determining employment status being introduced in the future is unlikely to be straightforward. The Government has commissioned further independent research on those with uncertain employment status to help with this task, and we are hopeful that this is a sign of the Government being fully committed to finding a way to introducing such a system in the imminent future.
Following hot on the heels of the public sector changes introduced from 6 April 2017, the Government separately announced in Budget 2018 that it will reform the off-payroll working rules (commonly known as IR35) for the private sector from 6 April 2020.
These tax and National Insurance (NIC) changes will impact medium-sized and large businesses in the private sector that engage off-payroll workers via intermediaries (such as personal service companies). The new rules will place the burden for assessing whether IR35 applies onto the private sector end user of the off-payroll worker’s services. Where it is concluded by the end user that IR35 applies, the fee payer (which may be the end user themselves or another third party that pays the intermediary) will become responsible for accounting for and paying the related tax and NIC due, including the additional cost of employer’s NIC (currently charged at 13.8 per cent), and possibly the apprenticeship levy, to HMRC. This represents a major shift in the party who is responsible for considering the IR35 rules, and for accounting for and paying the tax and NIC due where IR35 applies. In the private sector currently, responsibility for both normally sits with the off-payroll worker’s intermediary (eg the personal service company).
Where the end user of the off-payroll worker’s services is a small business the responsibility, from 6 April 2020, for assessing the arrangements and applying IR35 will remain with the off-payroll worker’s intermediary.
The rules for deciding employment status form an integral part of the process for determining whether IR35 applies. The two are inextricably linked and the rules for determining status will therefore be a key consideration for medium-sized and large businesses in the private sector preparing for the introduction of the reformed IR35 rules. Ongoing uncertainty around the nature and timing of changes to the employment status tests is therefore extremely unhelpful.
Given the forthcoming IR35 changes, we hope that the Government will publish further details of its intentions around determining status, with specific timings for change, at the earliest opportunity. There is still, however, much that private sector businesses affected by these reforms to the IR35 rules can do now to prepare for change. This includes identifying the workforce population potentially affected, considering how processes and procedures might need to change, and assessing how this could affect resources and costs in the future.
More detail about the IR35 reforms to the private sector, and how RSM can help businesses prepare for these changes can be accessed here.