The majority of the UK workforce is made up of employees, people who work for a public or private organisation and who pay their income tax at source through the pay as you earn mechanism. PAYE (as it is universally known) was first established as long ago as 1944, primarily to improve the flow of funds to a UK treasury under considerable strain due to the cost of the Second World War.
Now PAYE provides the bulk of income taxation revenue available to central government and, indeed is the largest single form of revenue for the treasury. However, as time has passed an increased proportion of the workforce has been classified as self-employed and they are therefore eligible for self-assessment of tax payable on their earnings. Moreover such tax as is due may be legitimately delayed for up to 10 months after the year in which the money was earned. Necessarily, this seriously delays the cash flow to the treasury, which is one reason why various regulatory bodies have sought to better define the boundaries between those who purport to be self-employed and those who genuinely are self-employed. The concern being that the former group are probably getting away without paying their fair share of tax and, importantly, national insurance.
For many the ideal would be a world where everyone was employed and paying their taxes ‘on time’. However an efficient economy relies upon a flexible labour market with casual workers readily available to satisfy peak demand. There are therefore solid grounds for accepting a level of independent workers who may move from job to job and, ideally, contribute to the efficiency of the economy.
The tension between those who favour maximum flexibility for the labour market and the interest of the treasury has been a factor governing aspects of the chancellors’ budgets for some years. Recall, for example, Philip Hammond’s attempt to increase the National Insurance contributions of some of the self–employed in his 2018 budget. Such a move had been partially presaged in The Taylor Report published a year earlier which had set the groundwork for reform and compliance changes with respect to the boundaries between workers, dependent contractors and those who are deemed to be the genuine self-employed. A keynote recommendation of the report was that Government should seek to treat all categories of ‘worker’ equally. So that pay and other benefits such as holidays should be equally available to all.
The formal Government response, effectively accepting the report’s recommendations can be viewed at here. In particular the objective of a level playing field had inspired the proposed changes to IR35 to ensure that the majority of dependent contractors will become employees and therefore drawn into PAYE and higher National Insurance contributions. As the report observed:
“For those who find themselves dependent contractors now, rather than self-employed, the situation is more complicated. Many of those participating through the gig economy are already workers under today’s framework – as being established by the courts on a case by case basis. However, there will be some, especially where the right to substitution is genuine, who fall into this category for the first time”
In a submission to the review body, a private contributor made the robust point that there is a £60 Billion elephant in the room; namely Employer National Insurance Contributions. These contributions massively encourage employers to use more flexible self-employed workers whenever possible. This fact has led to the conclusion that most organisations that presently use dependent contractors are unlikely to renew many of such contracts. Instead they are likely to rely on more casual self-employed labour, particularly if such work can be provided through a gig platform.
This example of the law of unintended consequences has meant that the government has recently decided that the changes to IR35 need not apply to existing contracts, but will only be enforced for new agreements. So, existing dependent contractors can keep their jobs – for now!
However, the Taylor Report made an overwhelming case for more wholesale changes in the laws affecting employment, at one point noting that the word ‘worker’ itself lacks consistent interpretation also noting “It seems to us that employment status and payments of tax and NICs are often connected particularly when it comes to temporary work… We believe that the number of cases in the Employment Tribunal and higher courts each year evidences that the lack of clarity in relation to definitions in the law itself is central to a growing problem. The lack of consistency with tax law, which often uses variables adopted by the tax authorities based upon employment law principles, adds to this and together simply serves to create ambiguity and confusion”.
So the challenge is there for Government to grasp and almost certainly more fundamental legislation is required than simply making changes to National Insurance rates or IR35. Particularly when you take cognisant of the warning in the Taylor report that “a business that can design a workforce model that relies almost exclusively on self-employed labour has the potential to gain a significant market advantage”
Meanwhile the government has welcomed the Taylor Report and declared “… the case that good work can lead to greater performance and therefore increased productivity is strong and so we will take the necessary steps to achieve this. The UK’s Industrial Strategy vision includes ‘good work and greater earning power for all’. That is why we made clear in the Industrial Strategy that the Business Secretary has accepted responsibility for good work and will now lead efforts in government, working with business and the devolved administrations, to promote good work across the UK”.
As the situation with IR35 has illustrated, this may be easier said than done and a crucial requirement for informed decision making is quality data on the labour market. The Campaign for Better Business Statistics has been established solely for the purpose of ensuring better information on the evolving digital economy and the development of independent gig work.
We would, of course, be pleased to have any comments on this or any of our other blogs.
– by Noel Hadjimichael
Good work, the report of an independent review of the labour market, commissioned by Government and published in 2017.
 So called because their contract is only with one company and their livelihood is therefore dependent on that agreement.