Employment Status, Tax and the Gig Economy—Improving the Fit or Making the Break? Judith Freedman
Summary:
The Coronavirus pandemic has highlighted major flaws in our tax and benefits systems. One particular issue is that of employment status and the differential amounts of tax and National Insurance paid by people providing their labour through different legal structures. Different structures also lead to varying administrative arrangements, making it hard to treat people in a similar fashion. Hopefully now is the time for radical reform of the tax and National Insurance system in order to align the treatment of all those who supply labour, whatever legal arrangements they happen to use.
Following on from previous reports that the author has written on this subject, Judith discusses what the government might do if they make any changes to the taxation of the self-employed.
“Although the desirability of alignment of the employment status tests for tax and employment law purposes, especially around non-standard workers in the gig economy who suffer from so much uncertainty, appears obvious on initial consideration, it is far from being so. Attempting a definition that works for all purposes is likely to lead to one that works well for no purpose.”
If alignment of the rules on employment status is not an answer, what should be done?
- Merge Tax and NICs
- Alignment of tax and NICs treatment short of merger
- Deduction of tax at source for a large group, wider than employees and workers
- Tax dividends paid in the same way as income from labour unless they are shown to be returns to capital
These proposals are a long way from aligning the definitions of employment status for tax and employment law purposes and they may appear more difficult and complex. However, trying to amend employment status definitions by statute in a way that covered both tax and employment law would tie the two together, so perpetuating tax distortions in decision making by engagers. The more radical changes proposed here could simplify the system and remove tax distortions, leaving employment law to develop unhindered by tax considerations.
https://www.tandfonline.com/doi/full/10.1080/09615768.2020.1789434
Judith Freedman is Pinsent Masons Professor of Tax Law and Policy. She has now moved to a part time role in the University of Oxford. She continues to teach on the MSc in Taxation, is Chair of the Tax Law Review Committee of the Institute for Fiscal Studies and is a member of the Board of the Office of Tax Simplification, an independent Office of the UK’s HM Treasury. She is also a Senior Research Fellow at Worcester College.
Published: 20 July 2020