Giving people rights simply does not pay

Having employment status law at the heart of the tax system doesn’t work – it’s too complicated, says Dave Chaplin

Exploitative working practices are an anachronism, but media headlines over the past year or so have shone a light on some companies which, in the 21st century, should be treating their workers much better.  

I strongly advocate the rights of workers and applaud the efforts of unions to fight for those in precarious work to have employment rights, as in the high-profile cases of Hermes and Deliveroo couriers.

Unfortunately, giving people rights does not pay and the tax system is to blame. It is stuck in the past and has not kept up with modern ways of working. We have a situation where the amount of tax paid by a firm when they hire an employee is considerably more than when hiring someone self-employed. There is a gaping hole in tax take – namely, that employers’ national insurance (NI) is not paid by the hiring firm.

Employers’ NI, as the Taylor review stipulates, is the £60 billion elephant in the room. It’s 13.8 per cent extra tax on top of the salary paid to a worker.

There is a strong argument and evidence demonstrating that flexible workers on the whole charge more than their permanent counterparts, so the Treasury gets more tax as a smaller slice of a bigger pie. 

But for many, the pie does not get bigger if they are self-employed. And that’s the problem. The low paid self-employed do not have the bargaining power to access higher wages earned by employees. Therefore, not only do they not get rights, the firm manages to cut its tax bill too.

What does this have to do with employment law?

In the tax system, the status of a worker is not a choice. HMRC could say that a person’s tax status was wrong, claim that person should be classed as an employee, and demand back all those extra taxes. 

For sole traders, HMRC demands the employers’ NI back from the hirer. For the self-employed using limited companies in the private sector, IR35 applies and the contractor must pay their clients’ employers’ NI tax bill. Under the off-payroll tax rules in the public sector introduced in April 2017, the hirer now pays the employers’ NI bill. HMRC has now proposed to roll out the same rules to the private sector.

To determine the person’s tax status, we must look at employment law to establish if they are an employee or self-employed. There is no worker status in tax law. And the rules to determine status are the same as those used in employment law to assess employment rights. Assessing someone’s employment status is hard, and top tax experts and barristers argue long and hard in court over this issue.  

Staggeringly, proposals by HMRC move the onus of assessing the status of workers who use limited company-based contractors onto the companies that hire them who are not equipped to conduct assessments. Some blanket bans on using contractors have been imposed as a result.  However, 94 per cent of contractors said they would seek to avoid contracts that place them caught by IR35 and treated as ‘deemed employees’. The net result sees a talent and skills shortage.

My advice to hirers to mitigate the risk of likely changes is: 

  • acknowledge and address the major risks your organisation faces
  • start testing IR35 status immediately
  • work with contractors to help achieve IR35 compliance
  • plan for the possibility that some contractors will leave
  • be prepared to defend your decisions by collecting evidence of compliance

With all this confusion and chaos, why do we allow our tax system to be so prominent and damage our economy so much that it reduces productivity by introducing friction into trade?

The answer: governments are too afraid to fix the tax system. They need to reduce the disparity between the taxes paid by hiring employees compared to the self-employed. Until then, we will have this perverse set of tax rules that no one understands and which causes pain for those just trying to conduct business.

So I applaud Matthew Taylor’s commitment to challenge and clamp down on firms which are using the on-demand gig economy to effectively suppress workers’ rights, pay them less than the minimum wage and deny them their rightful benefits.  

What I do not support is the current structure of the new off-payroll tax which hands employers an open ticket to hire low paid workers as ‘deemed employees’, enabling them to push their own tax bills onto the worker, further cutting their wages, while denying them employment rights. 

How can an MP look a low-paid constituent in the face and say “I know you have been assessed as an employee under law and are now earning less money, but you were a tax cheat and now it’s fair. I voted for this new mechanism whereby you will be classed as an employee, pay your employers’ tax bill, but receive no employment rights. That’s fair, you see?”

If a firm hires a worker and they are assessed under employment law as being an employee, I think the employee should get employment rights. That is fair.

Dave Chaplin is the founder and CEO of ContractorCalculator, a contracting authority for contractors, freelancers and the self-employed