What the Taylor review says about tax and employment

26 July 2017

The Taylor Report should be welcomed for its proposals to harmonise tax and employment law, say Richard Fox, head of employment at Kingsley Napley, and Graham Farquhar, an employment tax partner at audit, tax and consulting firm RSM.

It may not have come at exactly the right time politically speaking, but Matthew Taylor’s review will, we believe, come to be regarded as seminal. No more so than in terms of what it has to say about the relationship between tax and employment law when it comes to the vexed issue of worker status. In years to come, we may consider it extraordinary that we had so much patience for a system that arguably distorts employers’ relationships with employees, workers and contractors specifically – and even only – because of the differential tax and national insurance contribution (NIC) regimes that apply in each of these categories.

The fact these have not been synchronised in the past has created issues for employers, the vast majority of which are not looking to exploit. They want to be fair to their staff and contractors, while at the same time remaining competitive, so they can take their place in the markets in which they operate.

So often, tax considerations have dictated how a worker arrangement is structured. Arguably, the NIC system has gone further and actually incentivised employers to present an arrangement as being one of self-employment, whereas in purely employment terms it may have been regarded as something else.

Equalising the NIC regime

Taylor recommends the equalisation of NIC for employees and the self-employed. Skilled freelancers who can genuinely call themselves self-employed are likely to criticise this proposal. Their view is that they forego the benefit of secure work, the national minimum wage (NMW) and holiday pay rights in exchange for paying less NIC. However, the percentage of NIC paid by a self-employed person has reduced dramatically over the years, while the welfare benefits for the employed and the self-employed (which are funded by NIC) have broadly reached parity.

Taylor’s view is that those who can genuinely choose to work on a self-employed basis should not be subsidised by the tax system by paying less NIC when they are broadly entitled to the same welfare benefits. Further, NMW and holiday pay rights are granted under the contract and are not funded by the state. Those who are genuinely free to work on a self-employed basis can account for these rights by negotiating a higher fee for their services. In our opinion, it is hard to challenge this line of thought.

Tax was originally not part of the Taylor review’s remit. Very soon, however, it was realised that this was wholly unsustainable. Indeed, not to have included tax in the review would have made any outcome fundamentally flawed, and would likely have heralded a second review to look specifically at this issue. Doubtless, the change of heart was in part motivated by the government’s desire to combat tax avoidance and the burgeoning shadow cash economy. The proposals in this respect seem to have drawn support from HMRC. A more transparent and effective tax-collecting system would surely be a win-win for the country as a whole.

Welcome reform

If adopted, the Taylor review will ensure that UK employment law more accurately reflects the modern workplace. Employers will welcome its findings. It will allow them to be fair to, and transparent with, their employees, to comply with their tax obligations and to be able to compete on a level playing field with those around them. They will also have simpler tax and NIC arrangements with respect to all those who they hire.

The so-called gig economy has brought matters to the surface, alongside the spate of recent cases that it has heralded, from taxi services and pizza delivery companies to plumbers. All have shown that our employment law and tax systems need updating. To reform both in concert is both sensible and inevitable and would be positive for all stakeholders. We can only hope that the current political climate, with its concentration on all matters Brexit almost to the exclusion of everything else, does not prevent these important changes from coming to fruition.

This blog was first published by People Management Daily in July 2017.

Further information

For further information, please contact Richard Fox, head of employment at Kingsley Napley, or Graham Farquhar, an employment tax partner at audit, tax and consulting firm RSM.

See also our previous blog on the key employment changes proposed - The Taylor Report and the five key changes it proposes

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