Employment regulations are highlighting increasing numbers of anomalies, according to Paul Edwards, Tax Director at the Midlands office of national audit, tax and advisory firm Crowe Clark Whitehill.
And, he claims, it can all too often produce considerable unfairness.
His comments follow a campaign by some media organisations highlighting how many “special advisers” or local government officers “on contract” just work for one entity and regularly invoice that business or organisation. Therefore, they are to all intents and purposes employees and, it is claimed, are trying to avoid National Insurance (NI) and gain a lower tax rate/dividend payment instead of a salary.
Mr Edwards said: “What is an employee? That depends on who wants to know and why. Whether someone is really self-employed or not is a thorny issue.
“The problem arises because there are different definitions for different purposes, and this leads to anomalies.”
“For example, somebody can be self-employed for Income Tax and National Insurance purposes and yet be considered as an employee under employment law.
“Even the government has expressed concern at the number of people ‘off payroll’ within their own departments and this is widespread in certain other industries too, notably Information Technology.”
Mr Edwards pointed out that IR35 tax legislation has been designed to tax ‘disguised employment’ at a rate similar to employment.
It is targeted at workers who receive payments from a client via an intermediary and whose relationship with their client is such that had they been paid directly, they would be employees of the client.
Before IR35 was introduced, employees who owned their own companies were allowed to receive payments from clients direct to the company and to use the company revenue as would any small company.
Company profits could be distributed as dividends, which are not subject to NI payments. Workers could also save tax by splitting ownership of the company with family members, in order to place income in lower tax bands.
Mr Edwards cautioned that it is often unclear whether IR35 should be applied to an individual contract or not – HM Revenue & Customs will not give an opinion until the contract has been signed, which means payment negotiations are being made in ignorance of the taxation costs involved.
Similarly it is unjust that workers in small family businesses should be taxed as if they were employed by their clients, yet not receive any of the legal, state and other benefits received by ‘normal’ employees.
And it could work the other way round.
Mr Edwards said: “A recent case found in favour of an individual whose ‘self-employed’ contract was terminated by the engaging entity, and yet it was determined that he was entitled to the rights afforded by general employment law.”
Noting that further legislation was expected next year, he added: “We shall have to see whether this clarifies the situation. Let’s hope so.”
He also warned of a potential impact on the forthcoming introduction of auto-enrolment for pensions:
“Engagers of individuals on a self-employed basis may need to consider auto-enrolling at least some of them into pension arrangements.
“But, if they do, what message will that send in terms of other aspects of employment law – redundancy, rights to holidays, sick pay and benefits?”
He added: “It is also no wonder that the IR 35 rules have come under such increasing scrutiny in recent times, with the BBC and many other public sector organisations being challenged as to why they have so many ‘off-payroll’ workers on their books.”