Kate, Upcraft, one of the contributors to our Payroll Management Manual takes a look at the recent rash of employment status cases and what the future might hold
From the perspective of court rulings, it does seem as if the issue of employment status is on a repeating loop at the moment. But the subject of employment status is anything but in a rut at the moment, in fact there are so many dimensions competing for our attention that it’s hard to keep up so let’s bring you up to speed….
The five dominant status cases of 2017 were Pimlico Plumbers, Deliveroo, Uber, CitySprint and Addison Lee. All involved individuals who wanted to assert that they were not self-employed from an employment law perspective but were in fact workers. This distinction has no impact on how their taxes are paid (more of that quagmire later) but entitles them to a whole raft of beneficial (for that read expensive if you’re the hirer of the worker) employment rights: pensions, holiday pay and national minimum wage. The business owners, or platform owners as Uber argues it is, need to offer competitive pricing by minimising employment costs. To do this they have all attempted to craft contracts or agreements that on paper fall firmly into the realms of self-employment: no mutuality of obligation, substitution rights and limited direction or control. So why are these elements important and why despite all the efforts to assert self-employment did the courts take a different view? In a nutshell because the way that the contract was carried out in practice substantially different from what was written down.
MOO takes centre stage
Since the days of the seminal employment status case of Lorimer v Hall, employers, HMRC and the courts have all adopted the view that assessing status is all about ‘picture painting’ ie looking at all of the facts of the engagement to work out a view as to the status of the individual. In the last 12 months however, one aspect of the relationship has become much more prominent: MOO or mutuality of obligation. In an employment relationship there is specific mutuality: the employee must do the work offered and in return is paid for that, and even if there is no work he must be paid or formally laid off when he will also qualify for some payment set by statute. In a self-employed engagement there is no mutuality, the hirer can terminate the engagement and the worker can decline the work. Well that’s the view the courts consistently take, but it’s not HMRC’s view any longer it now seems.
Since April 2017 public sector bodies have had to consider the employment status of all their contractors working through personal service companies (PSCs), this is known as the 'off-payroll' rule. A PSC is a limited company or partnership that normally employs only a single individual who is then supplied to hirers. Creating the limited company/partnership puts an intermediary between the worker and the hirer and since 2000 it has been for the PSC to decide if the fees received from such engagements should be taxed as PAYE income on which tax and NI should be levied because if the intermediary didn’t exist the engagement would be one of employment. The decision about whether deemed PAYE income exists rests on whether the PSC considers there is ‘disguised employment’ as the now infamous IR35 press release of 1999 refers to it, unsurprisingly very few PSCs do consider themselves caught by IR35. For HMRC to challenge this assertion and levy tax and NI they have to take each individual PSC to the tax tribunal which is impossible for a resource-strapped tax authority. So, from April 2017 the government reversed the status decision process and now requires the public sector body who is hiring the PSC to decide if the engagement would be one of employment if it were not for the existence of the intermediary limited company or partnership. To help with this, HMRC designed an online tool: The Check Employment Status for Tax (CEST) tool. The idea being that the tool would reflect case law over the last four decades and if the posed questions were answered accurately it would be able to make a determination of status. It has emerged though that HMRC have not included any questions about MOO in the tool as they consider that it always exists in both a self-employed and employment relationship. There is a fundamental disconnect here as HMRC appear to be conflating the fact that all contracts of self-employment have mutuality from the perspective of once the contract is agreed the hirer is bound to pay for the work completed if it is to the required standard, and ‘specific MOO’ which would be the obligation to continue to use the services of that contractor and for the contractor to have to take up further projects. It’s crucial that this difference of approach is ironed out as at present many more contracts in the public sector will be deemed by the CEST to be caught by the new off-payroll rules. Why does this matter?
- It matters to the hirer as being caught by the off-payroll rules means the payment of employer's NI and apprenticeship levy on the fees of the contractor
- It matters to the contractor as they will be paid net of tax and NI when they submit their invoice
- It matters to the private sector as the government is consulting on rolling out the off—payroll rules
Tax v employment law
One of the additional complexities of the status debate is that the tax treatment doesn’t follow employment law. The individuals in all of the high-profile status cases of 2017 all wanted to be classed as workers, not self-employed, as to do so moved them into the territory that required the hirer to offer them holiday pay, pensions and national minimum wage protection but without them having to be classed as employees and subject to PAYE and NI. In tax terms there are only two ways to treat income: if it’s employment income it’s subject to PAYE and NI, if not then it’s trading income and tax will be computed base on profits and any salary extracted from the business. So, the headache is all for the hirer: cost plus complexity.
It’s easy to say as a result of Pimlico Plumbers et al that the workers, as they now are, must now receive all these benefits. But how, for example, do the payroll teams within the organisations assess the fees on an invoice for auto-enrolment, take pension deductions from an invoice and pass them to the pension provider, when these are not employees that are present on payroll systems?
What does the future hold?
The one certainty is that the flow of status cases will not diminish now that there are no tribunal fees to act as a deterrent and the prize for the claimant is all positive: extra employment rights and no change to tax treatment.
BEIS (The Department for Business, Energy and Industrial Strategy who have just finished consulting on the government’s response to the Mathew Taylor review of status have been clear to stakeholders that they don’t intend to abolish the category of worker and that the tax treatment is not up for consideration at present. Whilst it is understandable that the government doesn’t want to be seen to remove employment rights from a section of the workforce it’s clear that unless and until the following happen, tribunals will continue to be dominated by such cases:
- Set a statutory status test in legislation (we managed to do it for tax residency after all)
- Accept that as the Exchequer loss is all around employer's NI and apprenticeship levy that is not paid for contractor engagements, one way to level the cost playing field would be to set a ‘contract levy’ on self-employed fees incurred by an organisation and set it at the same level as employer's NI
- Revisit the CEST tool so it incorporate specific MOO in relation to the engagement itself, not just the obligation to be paid for the contracted work
And finally, if the off-payroll rules are to be rolled out as is expected, then confirm that quickly after the consultation closes on 10 August and give industry and HMRC until at least April 2020 to sort out the best way forward to deliver revenue for the Exchequer, a flexible workforce and certainty in cost exposure for hirers.