IFS seminar on employed versus self-employed status

Employed or self employed? Was the question posed at a recent Institute of Fiscal Studies seminar on worker classification. (June 2001)

Over 60 attended the IFS seminar to hear several experts on employment status issues and tax discuss the problems inherent in the UK taxation and employments law classification of workers between employed and self employed.

The interest in the topic is reflected by the wide diversity of groups who attended. Apart from Professional Contractors Group the attendees came from groups as diverse as the Institute of Directors, the Construction Confederation, the Inland Revenue, the DTI, the National Group on Homeworking, various universities, the Federation of Master Builders, the Institute of Taxation, the Bank of England and the Maternity Alliance. There were also several employment lawyers and representatives from several large companies.

Speakers included Professor Judith Freeman of the LSE, Dr Simon Deakin from Cambridge University, Tracy Gale from the Inland Revenue and Steve Walker an Assistant Director from the DTI. Anne Redston from Ernst & Young was one of the members of a distinguished panel which answered questions at the end.

Judith Freeman spoke first about “Tax Classification in the Changing Labour Market”. This drew heavily on the recently published IFS Tax Law Review Committee discussion paper of the same name, which she wrote. This is a 140 page review carried out at the request of the Tax Law Review Committee, which has been considering the issue of tax equity as between the employed and the self employed.

In her presentation Professor Freeman noted that the issue of status had been brought even more into focus by IR35. She commented that she had recently been to a conference in Lisbon and while there had got into conversation with a delegation of British railway engineers. When they learned that she was involved in tax and status issues, they proceeded to quiz her extensively on IR35!

Professor Freeman stated that the need for a single dividing line to distinguish between the employed and self employed conflicted with the reality that the spectrum of workers shaded gradually from clearly employed at one end to clearly self employed at the other but left a large group in the middle who shared many characteristics. This central grey area really needed a range of classifications.

She looked briefly at status case law and commented that the Courts placed too much emphasis on the facts and need to give greater guidance. In her view the Courts were forever stating that no checklist approach was possible while proceeding to give judgements that seemed to be very much a checklist of factors. She noted that the Revenue had recently added their summaries of key cases to the Employment Status Manuals on their web site but remarked that it appears that some summaries did not seem to be totally objective in that they quote selectively from the judgements. In particular she cited their summary of the Hall vs Lorimer case, where the Revenue have referred to the High Court comment that provision of equipment by the client was being a pointer to employment, whereas the judgement in the later Appeal Court hearing made it clear that in many cases the fact that the worker did not provide the equipment was not indicative of employment.

She also cited problems surrounding mutuality of obligation, especially the divergence as to what are the key issues on mutuality of obligation as between tax law and employment law. She commented on Justice Burton’s remarks in the PCG judicial review hearing about mutuality and the Revenue’s rather defensive attitude to this issue and emphasised that this was an area where the Courts need to give greater guidance. She also looked briefly at the growing trend in Employment Tribunals to look through the corporate veil where service companies are involved and referred to the recent decision in O’Murphy versus Hewlett Packard.

She concluded that there was a pressing need to clarify the relationships between tax, NIC and employment law.

The second speaker, Dr Simon Deakin, who is Reader in Economic Law at Cambridge, spoke on the historical development of employment law. He summarised the self-employed as falling into two classes. The real self employed, in business on their own account, and the ‘dependant self employed’ who were usually dependent on one client/employer at a time and had little or no business assets or goodwill.

He was followed by Tracy Gale, an Inland Revenue policy adviser in their employment status team, and Brian Campbell, an Inland Revenue technical adviser on employment status. Tracy Gale noted that by December 2000 about 12% of the workforce were self employed. She referred to a study carried out in March 1999 by Burchell, Deakin and Honey which reported a similar level of self employment and also noted that only 2% of those interviewed professed to be uncertain as to their status. She referred to claims that the Revenue were concerned with maximising the tax take by reclassifying more self employed as employed and she quoted the Revenue’s published policy that their aim is to ensure that;

“People should pay the right tax and NIC at the right time and on the right basis”.

She confirmed that as far as determining status was concerned they look at the factual reality of the engagement not just the contract. She stated that a Dutch study had found that our case law based approach to employment status has been found to be better than other approaches that take a more regulatory-based approach. Any attempt to legislate for the borderline areas would reduce flexibility and stifle the evolution of status criteria. The Government was also keen not to introduce more special cases into this area.

Brian Campbell indicated that the Revenue has three technical advisers on status matters, about 70 status inspectors around the country and about another 70 employer compliance officers who dealt mainly with the operation of PAYE systems but could also flag status issues. The Employment Status Manuals had been written for the Revenue’s staff to use and were the Revenue’s only internal guidance on status matters.

When approaching an employment status issue they try first to establish the facts. They then look at the contract and try to apply case law to the situation in deciding the nature of the contract. He confirmed that the top three factors for consideration were the right of control, the requirement for personal service and mutuality of obligation. With regard to the latter he stated that in case law the “irreducible minimum” required for mutuality of obligation to exist was the requirement for there to be payment for work done and for the work to be done personally.

Finally Steven Walker, an Assistant Director from the Employment Relations Directorate of the DTI gave the DTI’s view on employment status. He noted that employment rights had developed piecemeal. Most rights related to employees but some were for the wider category of “worker”. The Government had planned to consult later this summer on employment status as it relates to employment rights but following the election it was possible that priorities could change.

The seminar concluded with a panel discussion which included Anne Redston from Ernst & Young. She stated that IR35 was unsustainable as a piece of legislation. It was too uncertain and unclear to operate effectively.

Kevin Miller representing PCG commented that the classification of “dependant self employed” referred to by Dr Deakin, which was the real target of IR35, was misleading as it covered at least two different groups. There were the contractors who voluntarily worked through intermediaries and whose intention was to be an employee of their own business. Although many might be dependent on one client at a time they were totally different in nature and outlook from the many lower skill workers, such as train drivers and health service workers, who were forced to work via intermediaries by their “disguised” employers and who would regard their “client” as being their employer. Anne Redston agreed that the distinction between those who contract voluntarily and those who do so as a result of pressure from strong employers was vital and must be recognised.

Kevin Miller also noted that it was ironic that IR35 had effectively tried to legitimise taking away employment rights from such workers by stating that where workers worked via an intermediary then their “disguised employers” would not suffer any employment liabilities. He also commented that the surveys that said that workers found it quite easy to conclude whether they were employees or self employed were misleading. If any PCG member were asked what their status was they would say they were employees – of their own business. It is only since IR35 was introduced that they have to consider the hypothetical question of whether they might be employed or self-employed as regards the relationship with their client. This was a matter of great uncertainty.

Several attendees commented on status issues within the construction industry, which is the largest single employer of the self-employed. Some 20% of all self employed work within construction. Here unions are concerned that workers are being deprived of employment rights.

The seminar closed on a rather macabre note when one speaker remarked that one feature of the construction industry was that all workers are reclassified as employees by the Health and Safety Executive when they are killed at work!

There seemed to be a general consensus that there is a pressing need to ensure greater clarity and consistency in the status of workers as employed and self employed as regards both tax and employment law issues. There is also a need to address the underlying factors that make the distinctions between employment and self-employment so significant.

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KevinM