Would a third tier work system sort out UK taxation?

One of the great anomalies of UK tax is that there’s no clear definition of employment. Not what constitutes a role, per se. Rather, what defines the status of the worker carrying out that role.

It’s this ambiguity between employment and self-employment that accounts for many tax discrepancies. But rather than try and make a true divide, the last Autumn Statement did the opposite.

Umbrella workers who’ve enjoyed travel and susbsistence relief will, from April 2016, no longer benefit. Instead, anyone continuing to claim these benefits will go straight to PAYE, do not pass Go!.

So, yes, you can still contract through your pay-roll provider. But what you earn will be subject to the same tax as permanent employees.

Now, if you’re self-employed, you pay Employer’s as well as Employee’s NICs. So only those with more money than sense will continue to claim travel and subsistence relief after the act.

This is exactly what the taxman wants. Umbrella workers themselves don’t want this change. Nor, as is likely, do clients who utilise short-term contractors to optimise their own bottom line. This is a benefit for the taxman, no one else.

The government has provided a large window for those who want to opt out of this type of payment structure. There are talks being held to discuss the finalised legislation, with all manner of stakeholders purportedly being represented.

The Rise of the Dependent Contractor

An article on smallbizlabs this week points to possible solution. Highlighting a similar situation in the US, this article centres on the imparity in the sharing economy.

There’s a clear-cut definition of working roles in many states. Whether that’s by default or by design is anyone’s guess. But workers have two clear identities:

  1. independent contractors;
  2. employees.

Similar to the UK, contractors are self-sufficient when it comes to pay and holidays. Employees in the US also receive similar benefits to those availed of ‘permies’ here.

But they’ve got a blurred line appearing, too. Two juries in California will soon preside over cases where clients use car-hire drivers, contractors by trade, in an almost full-time manner.

The cases will consider whether the drivers should be entitled to the benefits that their respective employers’ offer to their permanent employees.

Many of you will say, “Well, you can’t have your cake and eat it.”

But with the high profile cases of tax avoidance from global multinationals so prominent in the media, it’s clear that you can. Not only have your own cake, but take a fair slice of someone else’s, too, if you have the accounting nous.

A step backwards for the UK self-employed workforce?

The buzz surrounding these two precedential cases conveys the need for a middle ground. Not a middleman – there are far too many of those, already. The term they’re using to peg this middle ground is “Dependent Contractor”.

Allegedly, Canada and Germany have defined and cater for such a workforce already. The dependent contractor enjoys some of the perks of permies, but retains some of their independence as a self-employed entity.

Sound familiar? Yes, it’s pretty much the way Umbrella Companies work here in the UK.

The “rise of the dependent contractor” is expected to manifest in the US in the next 18 months. So you have to ask why the Conservative government is looking to devolve that way of working in the UK.

Again, the powers that be may not mean to be destroying a way of life. But then, the FSA never ‘meant’ to kill off the self-cert mortgage, either.

Let’s hope the interested stakeholders get a loud enough megaphone so that all opinions are heard when the talks discussing intermediaries take place. With the economy rising at only 0.3% (Q1 2015), we cannot erode the economic bottom line further by increasing pay-roll and intermediaries’ costs.

With the UK self-employed populace continuing to grow, the last thing we need is a step backwards. Especially if the bridge that was there has crumbled since the Chancellor’s passing.

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