OTS review employment and self-employment status

The Office of Tax Simplification (OTS) recently announced plans to hold a series of meetings this autumn that will review the 'boundary between employment and self-employment.' But what are the possible implications of this review for recruiters, and what has prompted the review in the first place?

Recognising the increasing complexity of determining employment status, the review seeks to address whether the current classification system is representative of today's work patterns. Indeed, the OTS points to the shifting trend and continued rise in the number of contract and freelance workers as the primary reason behind the review.

This rise, it suggests, has created a grey area where we often see some people classed as employed for one job but self-employed for another, in what the OTS calls a 'third way' – one whereby a person is neither 'employed' nor 'self-employed'.

Of course, any change to how a person's employment status is classified will have significant tax and National Insurance Contributions (NIC) implications in how recruiters pay their contractors. On this point, the OTS stated:

"It is important for the tax system to fit with the real world, but in many instances, case law is complex and difficult to apply, for large and small businesses alike. Offering more certainty to individuals and businesses would be a useful simplification.” 

It is because the law, in its current state, is so complex, that administering tax rules has become increasingly difficult especially for those working in multiple roles - get this distinction wrong and both recruiters and the contractors they employ could find themselves out of pocket. Consequently, this could have a detrimental effect on their businesses. As such, the review will seek to simplify the distinction between working and not working.

What is interesting is that the review will not take IR35 into consideration. But, if changes to the rules which determine employment status are to be made, then surely the legislation underpinning IR35 should also be brought up to date?

In response, the OTS states that it has already “made recommendations in this area and the government decided how to take the issues forward. The recent report of the House of Lords Economic Affairs sub-committee has also examined the area.'”

However, the good news is that both recruiters and contractors alike will be able to contribute to the review. The OTS added that “The Office’s work will be informed by consultation with interested parties, including forming and working with a consultative committee”.

The review and consultation process will start in the Autumn and will be made available for consideration by the UK Government at the 2015 Budget next Spring. It is expected to contain a series of what it calls 'significant reforms' for the next Government to consider. So it may be some time before we see any of the recommendations coming into play.

If you would like more information or to discuss how this review could affect your business, contact us and we will happily clarify any points you may have.