Modern employment and tax: A case for hypothecation

The publication of the Taylor “Good Work” report earlier this week highlighted the manner in which work practices in the UK have changed over the last decade or so. The expectation that workers would, in the main, have an employer, ceased a long time ago. And since the financial crisis that started in 2007 the growth of those working for themselves as self-employed or supplying labour as and when they seek to do so – especially as part of the so-called gig economy – has mushroomed.

Partly this growth is driven by a desire for flexibility on the part of the worker. But tax plays a big part too. Over the years the tax regime has steadily created a fiscal subsidy for self-employment. To some extent society should have no problem with some of this given the lack of benefits, and until recently pension, that self-employment brings.

But in recent years the fiscal differences between employment and other forms of labour engagement have been made worse. The tax burden of different worker categories highlights this.  A self-employed person earning £50,000 a year faces a tax rate of 24%; earnings via a personal company face a mere 19%. In contrast, an employee faces a rate of 32%.

And there is a further category of worker – that referred to in the Taylor Report as the “dependent contractor”.  Essentially, this means someone who has certain characteristics of self-employment but who is effectively under the control of the person or entity engaging their labour. If such a person has such a huge cost advantage over an employee because the engager does not have to apply employers national insurance to payments made to that worker, then why would the engager ever offer employment?  And in addition, if the worker – the dependent contractor – receives a higher rate of payment per hour because of the tax saved (as well as the flexibility they receive) the reason not to be employed grows.

So the tax system needs to be capable of changing to reflect the current environment; not a world of work from the past.  The concept of applying employers national insurance is one way as the Good Work report suggests. And although the reaction from businesses affected would be loud, as with the introduction of the Apprenticeship Levy, perhaps the application of this charge needs to be linked to some form of hypothecation for the tax raised – around education for example.

The key thing is we know that the tax regime is not compatible with modern ways of working today. It is what we do about that, when we do it and how we do it, that matters most. My profession, those representing business and workers, regulators and legislators need to start collaborating now. If we can reach consensus on solutions perhaps change is possible before it becomes inevitable.

Jonathan Riley

Jonathan Riley

Jonathan Riley is Head of Tax at Grant Thornton UK LLP. He was previously inspector of taxes and a senior policy adviser to the president of the board of trade.
Jonathan Riley

@JONATHAN_RILE

Head of Tax @GrantThorntonUK Building a vibrant economy. It provides opportunity to design tax regime fit for purpose: transparent & eases compliance. Views own
@PeterMannionMP Good idea. For the elimination of any doubt, not with you... - 5 hours ago
Jonathan Riley

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