Tax – and also, importantly, national insurance – need to be considered as part of any review into employment practices in the modern economy.
ICAEW Tax Faculty expressed this view in our submission ICAEW REP 30/17 to the Taylor review of Employment Practices in the Modern Economy.
Matthew Taylor, chief executive of the Royal Society of Arts, was asked last year by the prime minister to look at how employment practices need to change in order to keep pace with modern business models. His originally brief did not cover tax aspects. Our comments were submitted on 6 March 2017 and followed a meeting with Matthew Taylor on 21 December 2016. The review is due to report in the summer.
Tax (which for this purpose we take to include national insurance contributions (NIC)), has been a significant driver in the growth of self-employment and of people providing their services through companies. In addition, many of the complexities in current practices can be attributed to having different rules for tax/NIC and for employment law.
Tax and NIC law definitions of employment and self-employment are frequently not the same as employment law definitions. Whereas in tax/NIC law there are two categories of individual – employees and the self-employed – there are three categories in employment law – employee, worker and self-employed. Confusion is increased because some individuals treated as workers under employment law are treated as self-employed under tax/NIC law and others are treated as employed.
We therefore recommend that the review considers whether definitions of employee, worker and self-employed could be harmonised across the rules that affect employment, including the rules for: tax, NIC, employment rights, pensions including auto-enrolment, health and safety, and social security benefits.
Employment is taxed more highly than self-employment. This is mainly attributable to NIC. The review needs to take this, and the impact that it is having on working practices, into account. We recommend that an informed public debate should explore the differences between the rates of tax paid by the employed, the self-employed and self-employed workers, whether such differences continue to be justified, and if so what the differences should be.
The review might also consider how to help those with low earnings from more than one source which individually do not count for NIC and thus for entitlement to state pension and other contributory social security benefits.
In his Budget speech on 8 March, the Chancellor noted that Matthew Taylor is clear that differences in tax treatment are a key driver behind the trends currently observed in working practices, and that this conclusion is shared by the IFS and the Resolution Foundation. We are encouraged that this points towards tax and NIC issues being included in the Taylor review.
Unfortunately Matthew Taylor's 'previous career' gives little confidence in his ability to deliver an impartial report. the recent hiatus regarding the attack on Self-employment is evidence that the employed Civil servants with index linked pensions/paid holidays/paid sick leave/paid maternity leave, have no idea what it is like to be self-employed and we should not be supporting this obviously 'pre-judged' report.