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How might The Taylor Review impact IR35 and employment status?

An overview of Matthew Taylor's "Good Work" Report 

Thousands of UK contractors and leading industry voices have been waiting for Matthew Taylor’s Review into Modern Working Practices for some time. The review, commissioned by Government, was set the task of exploring the forces shaping the current and future of work in the UK, examining each sector of the labour market - from employed workers, right through to ‘gig economy’ workers and contractors.

As well as analysing UK employment, The Taylor Review dived deep into the role of the self-employment in society today, highlighting a number of measures it believes Government must consider if they are to truly unleash the potential of the UK’s 4.8 million independent workers.

Recent and unpopular changes to public sector IR35 have done little to convince UK contractors that the Conservative Party is the Party best-suited for micro-business and self-employment. And in many respects, the situation reached boiling point before June’s Snap Election, with a staggering 97% of contractors surveyed revealing they did not believe the current Government had the best interests of the self-employed at heart. Needless to say, any measures taken by Theresa May and her Cabinet to actively look for ways to improve the current self-employed landscape would be warmly welcomed, not to mention eagerly-anticipated.

And as expected, the review included references to and recommendations around legislation affecting IR35 and employment status, much of which could be hugely influential as the UK’s new-look Government look to lay down their plans in concrete for the next five years at least.

Simplify ‘complicated’ employment status rules

The Taylor Review called for greater clarification and simplicity when it comes to determining employment status of both self-employed workers and employees. To call the current situation confusing is putting it politely. For too long, the legislation around determining whether a worker is self-employed or employed has been clouded in contradiction and uncertainty, with inconsistencies when it comes to determining tax status. This has led to confusion surrounding the IR35 status of hundreds of thousands of UK contractors.

The Taylor report stated; ‘For individuals, not knowing your employment status means not knowing what employment rights you deserve. For businesses, this situation can lead to uncertainty about their responsibilities and what can be demanded from workers. The situation does not need to be this complicated.’

This is a move which in principle would be warmly welcomed. Controversial changes to public sector IR35 means it is now imperative that public sector organisations and agencies understand the difference between a genuine employee and a genuine freelancer or contractor. Unfortunately, the Taylor Review failed to provide recommendations for a statutory definition of what constitutes being self-employed.

While HMRC’s ESS Tool was specifically built to determine whether public sector contractors sit ‘inside’ or ‘outside’ IR35, concerns remain over its ability to make accurate IR35 decisions consistently - in many cases because imposing conditions aren’t supported by case law in some of the status tests. A move to simplify ambiguous IR35 legislation would begin to clear up confusion around employment status, but as history suggests, would not be entirely straightforward.

Update ‘ambiguous’ legislation

To simplify determining employment status, legislation must be made clearer. That’s a given. The Taylor Review outlines that, ‘employment statuses should also be distinct and not open to as much interpretation as currently, nor be so ambiguous that only a court can fully understand the basic principles.’

It highlights the need to include certain factors the Government currently use in determining employment status, into legislation. These include; Personal Service (whether the individual is required to do the work themselves), Control (the level of autonomy the individual has over their work), and Mutuality of Obligation (whether there is an assumed obligation to maintain the relationship).

These are the same key tests used to determine IR35 status, and so it goes without saying that joined-up thinking across the board is needed to ensure accurate employment status decisions for contractors. To avoid contradicting IR35 determinations, status tests must - one way or another - deliver certainty both to contractors and engagers, and remove the wide interpretation of the legislation which currently exists.

A move to update the legislation with these three key tests, while aligning employment status legislation and tax status legislation might ultimately be a step towards more simplified rules. In time, it could also spell the end of IR35, paving the way for a joined-up legislation which simultaneously determines both the tax responsibilities and employment rights of workers.

A new employment status tool perhaps?

That 85% of UK contractors do not trust HMRC’s ESS Tool to make well-informed decisions around public sector IR35 status speaks volumes. The Taylor Review urged Government to; ‘develop a free to use online tool that provides individuals with an indication of their employment status, similar to the Employment Status Indicator tool for tax purposes.’

Given sector concerns over the accuracy of similar existing tools, that The Taylor Review recommends another technology so soon should be met with caution. At this stage, technology must be backed-up by human expertise to ensure each case is given a fair and considered assessment.

Inside IR35? Receive employee-like privileges

As the lines remain blurred around what legally constitutes as a self-employed worker and employee, there has been a proportion of contractors unfairly and inaccurately judged to be inside IR35 – particularly in the public sector.

And given that contractors working inside IR35 are required to pay a similar rate of tax to an employee, the Taylor Review hints that they should enjoy similar protection and rights.

“Ultimately, if it looks and feels like employment, it should have the status and protection of employment,” the review stated.

If, as a contractor, you are caught ‘inside’ IR35 and made to pay a similar rate of tax to employees, then it goes without saying that you should be given similar privileges and protection. Currently, contractors working ‘inside’ IR35 often find themselves in limbo, unable to fully enjoy the financial benefits of working self-employed and unrewarded for the risks they take, all the while working without any of the rights employees receive.

The move towards greater protection for those working within the rules of employment should be welcomed. Not only will it level the playing field for contractors inside IR35, it will also clamp-down on end-engagers and employers who are unfairly benefitting from using contractors on employee-like arrangements, without paying NIC or offering employment rights.

For some time now, a number of end-users have been happy to use contractors simply to avoid paying employer’s NIC and offering other employment rights. And in a contractor’s hour of need in an IR35 enquiry, they quickly distance themselves from supporting the contractor to protect themselves, leaving the contractor alone to deal with HMRC.

Given the rise of the ‘gig economy’ and the growing number of workers such as Uber drivers and Deliveroo Riders to name a few, The Taylor Review has coined the term, ‘dependent contractor’.

Because ‘dependent contractors’ operate somewhere between employment and self-employment, they should – according to the review – be able to enjoy some employment rights. It could be suggested then, that tax status should follow suit, and contractors working inside IR35 should be treated as ‘dependent contractors’, and able to benefit from a number of employee benefits.

Interestingly, when it comes to determining who should be regarded as ‘dependent contractor’, the review recommends a move away from personal service and towards control. This is something alluded to in much of the IR35 consultation over the past few years, suggesting that control might well be the deciding factor in judging who should be classed as a ‘dependent contractor’ or as a genuinely self-employed worker, for both employment status and tax status.

A move towards equal tax-treatment

The debate whether the self-employed should be made to pay similar taxes to employees rolls on. The Taylor Review puts forward the case for balancing the tax system, stating that the current situation ‘is not justified, or sustainable, nor is it conducive to the goal of a good work economy’.

What the Taylor Review fails to highlight is the added risk which the contractors and self-employed workers take on, not to mention the lack of employee-like rights and benefits. Would levelling out tax make self-employment worth it financially?

From holiday and sick pay, to employer pension contributions, freelancers, contractors and the self-employed do not enjoy the same benefits as employees. So to call for a balanced taxation system seems short-sighted.

The review has urged that over time there should be a rebalancing of the taxation system, and that the self-employed and employed should pay similar rates of tax. It argues that to avoid a backlash from the self-employed, companies should contribute to NIC’s for their contractor workforce, as they would their employees.

This could go as far to deter many businesses from engaging with genuine freelancers and contractors, while taking away an element of a self-employed worker’s independence. The beauty of a freelance or contract agreement is that the worker and the company benefits from a temporary, flexible working relationship.

How influential the Taylor Review will become in shaping the Government’s plans for UK contractors and the self-employed remains to be seen. Only time will tell. And while there were some positives and indeed negatives to take from the results of this extensive look into the UK labour market, what matters most however, is that Theresa May and her Government are seemingly willing to listen, and poised to act. 

By:Benedict Smith

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