Think tank urges employment status review to address tax

A specialist taxation unit has called on the Government to address long-standing difficulties in classifying workers for tax in a consultation over employment status.

The Tax Law Review Committee (TLRC), a division of the Institute for Fiscal Studies (IFS), said the problem had been highlighted by IR35 which had 'thrown up many questions about the relationship between tax and employment law.'

Judith Freedman, IFS research fellow and TLRC member, said the consultation over employment status was a slow process but represented part of the 'drip, drip' process needed to finally get status rules changed.

She said: "It is a pity employment definitions were not looked at more directly before the introduction of IR35. We really need to get back to basics with status definition. We have called for an interdepartmental review encompassing the DTI and Inland Revenue but so far the DTI has not taken the opportunity to extend its consultation."

Whilst using references to IR35, the TLRC is conscious of politicising its submission to the DTI by pushing the legislation as a core issue.

Kevin Miller, tax expert, said: "The thrust of the IFS's argument is not necessarily that IR35 is wrong but that there is an inconsistency between employment status and tax status under IR35. The IFS is saying: 'If you are caught by IR35 for tax, then there is logic in saying employment rights should also follow.'"

The DTI said the IFS was one of a number of organisations calling for harmonisation of employment status definitions in taxation and employment law.

The Government consultation itself is focussing on whether 'the present coverage of employment rights reflects the underlying economic reality of the employment relationship' and 'whether a different coverage would better meet its aims for the labour market.'

It is also investigating whether employment rights should apply to the same category of working people or should be looked at on a case-by-case basis and whether small businesses face particular difficulties in relation to employment status, as well as a number of other issues.

"The suggestion that extending certain employment rights to all workers could increase certainty and clarity for those on the classification margins is only credible if all issues, including tax and National Insurance, are included in the clarification process," the TLRC warned.

The DTI consultation on employment status closes on 11 December. Submissions can be emailed before this date to: anita.thomas@dti.gsi.gov.uk.