The Taylor Report Part 2 – Tax and the Taylor Report
Further to our previous article, the Taylor Report, has been in the news again this week. This time in relation to its aim to address the knock on effect that the rapid growth in so called ‘self-employed’ individuals, generated as a result of the rise of the gig economy, has had on government tax receipts.
The report sets out that an employee pays National Insurance contributions on their earnings at a rate of 12%, with their employer paying 13.8% on top of this. Their self-employed counterpart pays 9% and a Class 2 National Insurance Contribution of £2.85 per week with no employer charge. As a result, the effective tax rates of a self-employed person are significantly below that of someone in employment. The report argues that such discrepancies in the economy inevitably lead to tax avoidance but also, and importantly for the gig-economy, create incentives for employees and employers to move towards a self-employed model despite such a model being inappropriate for the circumstances by all other indications and potentially detrimental for the employment relationship in the long run.
In order to identify the appropriate tax the parties should be paying, Matthew Taylor has recommended that one must establish whether individuals holding themselves out as being self-employed are in fact workers. In order to do this he suggests that the parties need to look at the reality of the relationship. He has identified the presence of ‘control and supervision’ as being a key indicator that an individual is in fact a worker rather than a self-employed individual, and as such, ought to be entitled to worker’s rights (and pay tax accordingly).
Taylor’s observation draws from the unique employment relationships born from the gig economy such as Deliveroo and Uber which have been at the centre of a number of high profile Employment Tribunal claims. Having analysed the themes considered by the judiciary in such claims, Taylor explains that the judgments point towards a finding of a relationship of control and supervision as indicative of worker status and the individuals concerned should therefore be described and treated as a worker for the purposes of benefits and tax considerations including National Insurance.
Mr Taylor said: “If you look at the judgments that the judges have been making [about employment rights in the gig economy], it looks as though the courts are saying that if it looks as though somebody is subject to control and supervision they should be described as a worker and not self-employed.
“Which, interestingly, is the same criterion used by the tax authority when they determine whether somebody is self-employed or an employee.
“We think that principle is right.”
“Workers” – which Mr Taylor has recommended be redefined as “dependent contractors”, as outlined in our previous article, receive a wider range of benefits and protections compared with “self-employed” people, including sick pay, holiday entitlement and the minimum wage.
Firms which engage workers are also obliged to pay national insurance contributions to HM Revenue and Customs at 13.8% of their earnings above £157 a week (as with employees).
Although it is difficult to judge the economic value of the gig economy, more than one million people work in the sector. If large numbers of them are reclassified as “dependent contractors”, this could have a major impact on the taxes payable to the government by businesses and workers involved in the gig economy. However, enacting such a change is not easy. In the Budget earlier in the year, Philip Hammond announced an increase in national insurance contributions to be paid by the self-employed. He had to execute a U-turn a week later when it was pointed out that the move breached a Conservative pledge made at the time of the 2015 general election not to raise income tax, VAT or national insurance. Nevertheless, if an organisation currently has a number of “self-employed” contractors, they should be aware that in the foreseeable future there may well be a government review of the nature of the relationship which could result in it being redefined. This would almost certainly have a knock-on effect on an organisation’s tax liabilities with respect of those individuals.