Employment status is under the spotlight again. A DTI Discussion Document is looking at the range of persons to whom employment rights should apply. In doing so it recognises the call by the Tax Law Review Committee (TLRC) to consider employment status more widely but nevertheless confines itself to the issues of employment rights. Commenting on the DTI's paper, John Avery Jones (TLRC Chairman) said: "Employment status needs to be considered across the board. It is not sensible to look at one piece of the jigsaw in isolation. Changes in one area may have implications for others. What we need is an inter-departmental review as part of 'joined-up' government. The DTI paper asks for views on whether there should be a broader review of definitions across employment and tax law. This is precisely what the TLRC has been calling for."

The DTI paper states, though, that 'Government would welcome views on whether there is a need for a broader review of definitions across employment and tax law'. The TLRC considers that a broad and 'joined up' review of employment status definitions is needed across Government departments. Many of the issues that the DTI document highlights as important cannot be considered properly without taking into account a range of issues.

For example, the effect of extending employment rights on the nature of the relationship between the work providers and working people cannot be calculated without considering the impact of any reclassification for tax and National Insurance purposes. For many people the first impact of any change in employment status would be felt in relation to tax and National Insurance. Decisions on whether to provide work might be affected by these costs. If employment protection is to be extended it will be important to decide as a matter of policy whether this results in any change in tax and National Insurance treatment. Another question posed by the DTI's paper is whether small businesses face any particular difficulties in relation to employment status. Classification for tax and National Insurance purposes may be one of the first problems faced by small businesses, compounded if there are apparent differences between different areas of law. In addition to the issues raised in the DTI's paper, there are long-standing difficulties in classifying workers for tax and other purposes. These have been highlighted again recently in relation to the personal service companies legislation, which has already thrown up questions about the relationship between tax and employment law. Further questions of this sort are likely to emerge. Further, economic and technological changes are encouraging new modes of working. The status of some special groups of workers, such as homeworkers, casuals and agency workers, raises problems alongside the more traditional issues that continue to cause concern. The suggestion that extending certain employment rights to all workers could increase certainty and clarity for those on the classification margins is only credible if all issues, including tax and National Insurance, are included in the clarification process.

The DTI document claims that the IFS, amongst others, has called for harmonisation of the employment status definitions used in taxation and employment law. This is an over-simplification. A discussion paper published by the TLRC recognised that tax law and employment law often have very different objectives and that there may be good reasons for different definitions of employee to be adopted for different purposes. The paper favoured consistency where there are no explicit differences in the case law or statute, together with clearly expressed differences where justified by deliberate policy decisions. Any such differences, it argued, need to be transparent and spelt out in cross-departmental Government guidance for business owners and working people.

The DTI document suggests that any review looking at the relationship between status for employment law and tax purposes might best be undertaken by the Law Commission. A thorough review of current case law and legislation such as the Law Commission would provide would no doubt be of value, but this body could not be expected to meet the need for inter-departmental Government action. A Governmental review is required to address fundamental policy issues about the relationship between different areas of the law as well as to provide consistent cross department guidance.

Ends

Notes to Editors

1. The Tax Law Review Committee (TLRC) was launched by the Institute for Fiscal Studies in October 1994. Committee members come from a wide variety of backgrounds and are drawn from the judiciary, the professions, commerce and industry, former members of the Revenue departments and academia. The members include political supporters of the three main UK parties. The Committee is sponsored by a number of private sector companies and individuals. Its President is The Rt. Hon. The Lord Howe of Aberavon CH QC. The Committee is chaired by John Avery Jones CBE, and its Research Director is Malcolm Gammie.

   The TLRC has taken an interest in the tax problems surrounding employment status for some years. The Committee has considered these problems as part of the wider issue of horizontal equity between different groups of taxpayers. In 2001, the TLRC published a Discussion Paper (Employed or Self-Employed? TLRC Discussion Paper No. 1 by Judith Freedman) available from the IFS. This does not represent the TLRC's final views but raises a number of issues concerning legal status of workers for tax purposes. At a conference held to discuss the paper, attended by a wide variety of groups, there was strong support for an inter-departmental review of employment status, which would examine status for employment law, health and safety and tax and National Insurance purposes. Judith Freedman is KPMG Professor of Taxation Law at Oxford University and a Fellow of Worcester College, Oxford.