In its proposals for a phased integration of income tax and national insurance contributions (NICs), the OTS Small Business Tax Review grapples with the knotty distinction between employed and self-employed status. The definition currently in use, the report suggests, has not kept up with changes in working patterns in the UK, with growing numbers of people having multiple employments in response to the commercial requirement for greater flexibility (para 3.16, p. 23). This, of course, is evidenced by the growth in the numbers of people working through umbrella companies and limited companies.
Contractors undertaking projects for other companies face confusion as to whether to consider themselves self-employed or employed under current rules, because there is a ‘lack of consistency’ in the application of the boundary between the two legal forms. As things stand, employers using self-employed workers run the risk of HMRC challenge – just one mistake in the status of an employee could be enough to put some small firms out of business, the report notes (para. 3.21, p. 20). Differences between income tax and NICs for employees and self-employed workers have become exceedingly complex and difficult to regulate. Income tax tends to be similar for employed and self-employed workers but NIC liability diverges widely. Employees attract NIC charges of 23.8 per cent, whilst self-employed workers pay only 8 per cent.
To overcome these complexities, the OTS sets out a number of phased policy options, including the core recommendation of aligning NIC and income tax rates. This would remove NIC ‘special cases’ and largely render IR35 redundant. Additionally, it suggests joining up the consequences of employment across all Government departments, and significantly narrowing the differences between tax rates on employment and self-employment.