Under employment law, a person is either employed, self-employed or something in between referred to as a ‘limb (b) worker’. Employees benefit from the full range of employment rights; the self-employed can benefit from none. Those who fall between the two stools as a worker benefit from some employment rights such as the right to be paid the national minimum wage and have paid holidays, but not others such as maternity leave or the right to receive a payslip.
For tax purposes, a person is either an employee or not. There is no ‘worker’ category. If someone falls into the worker category for employment law purposes, they are generally treated as self-employed for tax purposes – but might not be.
The Pimlico Plumbers case concerned employment rights. Mr Smith had claimed that an unlawful deduction had been made from his wages, he had not been paid his holiday pay and he had been discriminated against on grounds of disability. Smith only needed to be a ‘worker’ to assert these rights and not an employee. As a worker, he had declared his income as a self-employed person.
The decision of the Supreme Court will have far-reaching implications for the rights of individuals working in the gig economy, but what does it mean for tax purposes? At present, the answer is not very much. But the decision deserves further attention in the context of ongoing HMRC consultations.
The employment status consultation launched in February set out the problem of having two separate bodies of law determining employment status and considered whether it would be possible to have a single test for employment law and tax purposes. On one hand, this would simplify the framework that employers must operate in. On the other, one possible outcome would be that ‘workers’ would be taxed in the same way as employees. This would lead to the many who currently benefit from being taxed as self-employed being redefined as employed. This would mean increased national insurance charges and more limited ability to deduct expenses.
The consultation is also considering the wider issue of whether the existing approach to determining whether an individual is an employee or not for tax purposes is outdated, subjective and too complex. The government would clearly increase the amount of tax and national insurance collected if the army of gig economy workers are taxed as employees instead of self-employed individuals.
A second consultation covers the proposed extension of the off-payroll working rules to the private sector. These rules have applied in the public sector since April 2017 and require that payments made to companies providing the services of individuals be processed through the payroll “if the individual is acting in the same way as an employee of the client”.
It is likely that the employment status consultation will result in a test for employment status, which will see more individuals being treated as employees than under the current rules. If this happens, individuals providing their services through their own personal service company (ie off payroll) and not currently within the IR35 rules will find that they will soon suffer deductions for tax and employee national insurance at source when their invoices are paid.
The Pimlico Plumbers case is a victory for individuals who feel they have been unfairly deprived of employment rights. This same decision will influence government as it crafts the new employment status test, and as a consequence we may find that individuals who can genuinely claim to be self-employed will soon become an endangered species.
Tim Stovold is head of tax at Kingston Smith