It is welcome news that the government has agreed to consider a recommendation by the Office of Tax Simplification (OTS) that there should be a simple statutory test for employment status. But watch out – a change of this nature will almost inevitably bring about its fair share of winners and losers…
The OTS has spent a lot of time this year looking at one of the very basic building blocks of the tax system: the operation of income tax and NICs through PAYE. Total receipts from these two taxes dwarf the amount raised by corporation tax, although you’d never know this from the way public attention is devoted almost exclusively to how much (or little) corporation tax is paid by the multinationals. So securing the tax base on employment income is essential to the public finances. But who exactly is an employee? There’s no simple test, and some of the case law underpinning the definition is only marginally relevant to modern practice: couching the distinction in term of masters and servants doesn’t exactly resonate these days.
So the fact that the government has agreed to consider the OTS’s recommendation that there should be a simple statutory test for employment status is very welcome, though I suspect that it will end up being far from simple.
The employed/self-employed distinction is fundamental to many aspects of the tax system, from the date tax is paid, to the deductibility of expense and the amount of NICs due. This last point is also on the OTS’s radar. The government has accepted there should be a full study into the alignment of tax and NICs payments - indeed the government hasn’t ruled out a full merger of tax and NICs.
These are deep-seated issues. Early in my tax career I remember talking to an official who had been asked to produce a simple check list for employment status. Thirty years later, and there have been several tentative projects for reform, but none has really got anywhere. But I do sense that this time change is possible. The work of the OTS brings intellectual coherence and practical insights into the problem and there appears to be the political will to tackle the problem.
Crucial to this is HMRC’s digital strategy. The simpler the system, the more likely it can be made to work in a digital environment. If everybody, employed or self-employed, paid tax and NIC on exactly the same basis with common payment dates, a technological solution would be much easier. But it would have consequences. A common tax base could impact pensioners, contractors, part-timers and seasonal workers. Change of this nature will inevitably bring winners and losers. The furore over tax credits shows just how difficult it is politically to deal with changes which make people worse off. Will the government want to risk this as the price for fundamental simplification?