How should different ways of working be taxed? CIOT and IFS debate How should different ways of working be taxed? Mark Groom 20 March 2017

What are we trying to address/achieve? Clear objectives + Roadmap from A to B Decreasing revenues from an increasing self-employed tax base Compliance & Boundaries between employment status Encouraging Investment entre-preneurialism job creation Protect vulnerable workers and/or those lacking bargaining power

Agency deemed employee Complex boundaries Key factors Self-employed Worker Agency deemed employee Officeholder, employee, IR35, Chapter 10 Carrying on own business undertaking  x Provision of substantial own equipment Financial risk Profit from own sound management Personal service (no unfettered substitution) Supervision, direction, control (how only) Mutuality of obligation ? Control (how, what, when, where) Integration/part and parcel of the business Personal factors () Intention of the parties Length of engagement Tax and National Insurance Income tax (Self Assessment) Withholding taxes (CIS 0%, 20%, 30% FEU 20%) Class 2/4 NIC PAYE Class 1 NIC Class 1 NIC (categorisation of earners rules)

Employed : self-employed boundary Class 1 NIC, c. £10K Total Gross

Employment rights boundaries Entitlements/protections Self-employed Worker Employee Single Tier State Pension £155.65 pw Maternity allowance/SMP – weeks 1 – 6 £139.58 pw 90% of pay (if >£139.58) Maternity allowance/SMP – weeks 7 to 39 Jobseekers allowance* – income based < age 25 (income based – means tested) >= 25 £ 73.10 pw £ 57.90 pw Protection for whistleblowers  Protection from unlawful deduction from wages Unlawful discrimination Working time including holiday pay (£) Auto-enrolment pension contributions (£) NMW / NLW (£) Unfair dismissal Redundancy payment Flexible working rights Protection on the transfer of an undertaking Statutory notice entitlement Statutory sick pay – 28 weeks £ 88.45 pw Jobseekers allowance* (contribution based) – payable for <= 6 months *Universal Credit

The Worker boundary Byrne Brothers (Formwork) Ltd v Baird & Others [2002] ICR 667 Policy intention to extend the benefits of protection to workers (whatever their formal employment status) who may be required to: work excessive hours, or in the case of the ERA or NMWA, to suffer unlawful deductions from their earnings or to be paid to little. Employees are thought to need such protection because they are in a subordinate and dependent position vis-à-vis their employers…the purpose of the Regulations is to extend protection to workers who are, substantively and economically, in the same position. Exclusion for those “carrying on a business undertaking” cannot include every person who is self employed. It is necessary to distinguish between: workers whose degree of dependence is essentially the same as that of employees; and contractors who have a sufficiently arm’s-length and independent position to be treated as being able to look after themselves in the relevant respects.

Sole trader : incorporated self-employed boundary Class 1 NIC CT Rate Total Gross

Sole trader : incorporated self-employed Key comparators 16-17 20-21 Personal Allowance 11,000 12,500 Basic rate band 32,000 37,500 Primary Threshold 8,060 8,411 Secondary Threshold 8,112 8,476 UEL 43,000 50,000 CT rate 20% 17% Dividend Allowance 5,000 2,000

Sole trader : incorporated self-employed Key comparators 16-17 20-21 Personal Allowance 11,000 12,500 Basic rate band 32,000 37,500 Primary Threshold 8,060 8,411 Secondary Threshold 8,112 8,476 UEL 43,000 50,000 CT rate 20% 17% Dividend Allowance 5,000 2,000

Conclusions What could we consider doing? Employed : Self-employed boundary Sold trader : Incorporation boundary Worker definition Compliance & boundaries Consider a new flat rate withholding tax for Workers. Replace employment status with PAYE Status. Consider statutory test, could be based on: new Worker definition SDC test (like agencies) IR35 to follow new PAYE Status Protect revenues Set PAYE Status at Worker level Align class 1 primary and class 4 NIC rates to benefits provided. Review CT and dividend withholding rates to remove tax arbitrage from legal form. Extend Chapter 10 to the private sector. Protect vulnerable workers Codify Byrne Brothers into new Worker definition. n/a n/a Investment, entrepeneurialism, job-creation Codify Byrne Brothers into new Worker definition. Broaden exclusions e.g. earnings/dependency based Ensure those carrying on a business undertaking properly recognised as self employed. Consider investment incentives. n/a

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