The way people work has changed more dramatically over the past few years than in the past few centuries. But tax legislation has not kept up with this – yet. Are you ready?
The way people work has changed more dramatically over the past few years than in the past few centuries. Digital has brought about revolutions such as the rise of the gig economy. The changes have blurred the boundaries between the certainties of status that held sway in the past. Tax legislation has not kept up with this – yet. But as various government initiatives show, legislative change is on the way.
Last year’s Taylor review focused on the challenges posed by gig economy labour: one of the key themes was employment status. Taylor’s conclusion was that the rules relating to this need to be reformed to take into account the new digitised workforce, ensuring that they (and their employers) are paying the right taxes and national insurance contributions. In its ‘Good Work Plan’ published in December 2018, the Government proposed more introducing employment law legislation to better define ‘employment’, and closely aligning the status tests for employment rights and tax. This is welcome – the current position is confusing for both individuals and employers. But there are still many questions over how the government plans to achieve this and no clear timeline.
Then there’s ‘IR35’, legislation which the government has used to address the taxation of off-payroll individuals engaged via intermediaries. HMRC estimates that one-third of all personal service companies should account for PAYE and NICs but only 10% do. This shortfall will contribute an estimated annual £3 billion to the tax gap by 2024.
In April 2017, rules were introduced that require public bodies to determine if the relationship between an individual engaged via an intermediary (such as a Personal Services Company) and the public body would have been one of employment if there had been a direct engagement with the individual. In the Autumn 2018 Budget, the government announced it will extend these rules to private sector employers by April 2020, shifting the onus onto ‘end users’ to determine whether the contractors they hire are genuinely self-employed. If they decide that if it were not for the intermediary company, they would be employees, the end users will have to deduct the correct tax and NICs.
What can companies learn from the trends we’re seeing in regulation of off-payroll workers? First, matters which used to be solely HR’s responsibility are now a concern for the tax function too – and for others.
HMRC is the enforcement agency in a number of areas relating to pay, such as employment status and national minimum wage. This is set to continue, with the Good Work Plan setting out an intention to create a new single enforcement agency with extended coverage to other areas such as Statutory Sick Pay and holiday pay compliance. All of this creates a clear increase in cross-functional working between employers’ tax and HR teams, and this trend will only expand as HMRC continues to increase its enforcement powers in respect of workforce issues.
Second, these issues are more widespread than many believe extending beyond the retail and care sectors. KPMG has worked on these issues with clients across many sectors, often outside the lower-paid workforce that people associate with the gig economy or National Minimum Wage compliance. HMRC’s newly strengthened 450-member NMW compliance team are already looking more closely at sectors such as industrial manufacturing, professional services and customer operations.
Lastly, companies’ responsibilities in respect of all their workforce extends further than before. The days of following straightforward siloed rules to calculate tax based on a simple distinction between employees and contractors are over. Compliance in these areas is no longer a box-ticking exercise. A business’s response to these more complex issues will speak directly to its culture, ethos, brand and reputation.
Strong policies, procedures and practices are vital. So is good, clean and accurate workforce data – the foundation to correct and accurate compliance. Having reliable data goes much of the way to ensuring the self-compliance that companies in all sectors will increasingly need to follow.
The onus is on employers to undertake the heavy lifting with this data: to carry out the pay and tax calculations, to check they have complied with all the rules before submitting the data and then, in effect, self-regulating and notifying the authorities of any issues arising from their compliance. And remember, this self-policing doesn’t stop companies from being fined, or being named and shamed if they get something wrong.
All this is leading to an increased reliance on data and analytics to ensure compliance with the new regulations. If employers aren’t on top of their data and ways of analysing it, they face a colossal task in complying with today’s requirements – never mind those of the future.
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