Benefits section of UK tax return. Photo: Drazen_
How the tax system is driving people into insecure work in unexpected ways
I work for the Low Incomes Tax Reform Group, a group of tax and welfare rights specialists with expertise in the tax and related welfare issues of the low-paid. Often, people contact us describing their problems with tax, National Insurance, tax credits and interactions with other means-tested benefits. A good number of the problems have arisen in the context of non-standard ‘flexible’ forms of employment such as agency work, zero-hours contracts and self-employment.
What we are seeing in our work supports other evidence and research (including the TUC’s) showing that the numbers of people in such forms of employment are rising. While much intellectual debate to date has revolved around how National Insurance contributions reform might help reverse this trend, correspondence we receive into our mailbox from workers exposes that, in practice, there are wider aspects of the system driving workers into these precarious forms of employment.
We wanted to share this insight to help inform the debate and because, in our experience, reforms which tackle only part of the problem are rarely effective in the long term.
Zero hours contracts
It is well established that there are incentives for employers to keep a worker’s hours low (or indeed to split up previously full time jobs into separate part time jobs) due to the fact that employers’ National Insurance (payable at 13.8%) only kicks in at £157 week. This equates to 20 hours @ the National Living Wage (NLW).
Putting National Insurance (NIC) on an annual and cumulative basis, as has been widely discussed, might help remove some of the attraction of zero hours or short hours contracts for employers (and – importantly – might make it easier for those on low pay with multiple jobs to build a National Insurance contributions record), but it does not address the fact that there are other employer obligations that can be avoided or minimised by keeping a worker’s pay low.
For example, if I am an employer and I only offer 15 hours a week at the NLW (meaning earnings of less than £113), I can potentially avoid:
- having to pay Statutory Sick Pay – currently payable at around £89 a week (for a maximum of 28 weeks) which, since April 2014, is not reclaimable from the Government for any employers;
- having to pay parental payments, e.g. Statutory Maternity Pay –much if not all of which is reclaimable from the Government, but payments can be hugely complicated to understand and administer (particularly the Statutory Parental Pay rules which were introduced from April 2015 – the technical guidance is 66 pages long and there are possible penalties of up to £3,000 if I get things wrong);
- having to pay any contributions into my workers’ pension scheme which I have had to set up for them under the auto enrolment programme (in rollout since 2012). Currently I have to pay 1% of qualifying earnings, but this is set to rise to 2% and then 3%, in April 2018 and April 2019 respectively;
- having to register as an employer with HMRC or operate a payroll at all, if I manage to keep all my workers’ pay at under £113 per week. This lifts a huge burden from my shoulders as I don’t have to worry about HMRC’s Real Time Information system which, since 2013, has required me to submit pay and tax information about my employee to HMRC every time I pay them (rather than once, at the end of the year, as used to be the case).
In terms of factors that pull (or push) workers into self-employment, clearly the more beneficial NIC treatment of the self-employed is a ‘culprit’ and no doubt, is one of the main reasons that ‘false’ self-employment is often foisted upon the unwary or desperate. Closer alignment of the NIC treatment between employees and self-employed could help reduce the drive towards self-employment in time, though such changes require careful thought as to any potential downsides for low-paid, genuinely self-employed, workers and how such impacts could be mitigated.
However such a move would do nothing about other differences in treatment that potentially contribute to the self-employment ‘problem’ – for example that fact that self-employed people can voluntarily register for Value Added Tax (VAT) while employees cannot. This, perhaps counter intuitively (until very recently), has proved lucrative due to the Flat Rate Scheme (FRS).
Let me explain. Under the FRS, a self-employed business charges VAT on its taxable supplies at 20% but instead of paying over this ‘output tax’ less any recoverable ‘input tax’, the business pays over a flat rate percentage. If this is say, 10%, then the business gets to keep 10% of the VAT they have collected for themselves. This is theoretically to compensate them for input tax that they have suffered on buying in goods or services in the course of their business, but often, self-employed businesses whose trade consists mainly of the provision of their labour will have suffered little, if any, such input tax. The FRS scheme can be of considerable benefit, essentially offering an additional income stream for the worker – or, as is likely, the intermediary who is helping them ‘manage’ their VAT registration for a bite of the cherry!
From April 2017, a self-employed person deemed to be a “limited cost trader” should apply a new rate of 16.5% instead of applying a lower fixed percentage based on their trade or profession removing much of the shine. On the other hand, we have yet to see whether these new rules will have the intended effect or whether any means of getting around them will be found.
No discussion of non-standard work would be complete without a mention of agency workers.
Agency workers historically were called upon as an additional labour resource. These days it seems that businesses are bringing in agency workers more frequently and in some instances are using them instead of directly hired staff to make up the bulk of the workforce, for example as in the case of Sports Direct.
One of the reasons for this is that agency workers (if they work under a special type of contract called an overarching contract or ‘umbrella’ contract) have been able to receive tax and NIC free home-to-work expense reimbursements under the ‘temporary workplace’ rules (swapping taxable salary for tax and NIC free expenses reimbursements also saves the employer 13.8% National Insurance on the expense element). Having this ‘tax efficiency’ throughout the supply chain means that contracts can be negotiated at lower prices and means that agency workers are a very attractive option for end clients.
HMRC take the view that these umbrella arrangements are using the temporary workplace rules in a way that was not intended. Further, all sorts of variations of the theme have popped up over time, which HMRC have not managed to tackle through their ordinary compliance and enforcement activity. New rules were introduced from April 2016 which were supposed to restrict relief for home-to-work travel expenses and spell the end for umbrella companies (except in cases where a worker is NOT under the supervision, direction or control of any person). But, with apparently little fear of HMRC, many umbrella companies are just saying that their workers fall outside the new rules and continue to claim relief on the same basis as before. They are also managing to avoid some other new rules from April 2016 which restrict their ability to process expenses, tax and NIC free, at the point of pay.
Even if measures were introduced which managed to address zero hour contract/false self-employment issues in the round, this option will be lurking in the background for employers to use to protect their profitability. HMRC therefore need to get a handle on the still thriving agency worker industry as part of any effort to regularise the insecure employment landscape – only such a holistic approach will bring about truly sustainable protection for low paid workers.