Industry participants critique ‘draconian’ UK tax system

The UK government must establish greater legal clarity in order to fix a damaging and costly tax system, accountants and lawyers have said.

The reaction follows a recent amendment to IR35 which added confusion to an already disorienting system. At present, the amount an individual is taxed can be disparate from their employment status.

“The tax definition is fulfilling a completely different purpose to the employment law and rights definition,” says Donna Sharp, employment law partner at KPMG.

“A step back is needed. Most people don’t understand the differences, and having a separate definition when the two are so intertwined is confusing. It would be much better to review the system and say ‘how do we actually want the labour market to work?’”

Under current UK law, an individual’s tax status is binary: ‘employed’ or ‘self-employed’. In the eyes of employment law however, there is now ‘worker’ status: a middle ground established for the gig economy. This entitles the individual to basic employment benefits whilst still being taxed as a contractor.

This separation was one of the key issues raised in the 2017 Taylor Review: an independent consultation on employment practices in the modern economy. The review advised that each tax category should be as closely aligned as possible.

With the added influence of the IR35 off-payroll regulations, many argue that the current system can be costly for both the individual and the employer, and can further enable tax avoidance schemes.

“If you do away with some of those distinctions, you might do away with some of the behaviours,” says Sharp.

Darren Fell, CEO of digital accounting firm Crunch, also expresses discontent with the current system, arguing that IR35 needlessly punishes contractors trying to earn an honest living.

“Every single element looks like a concerted strategy against the self-employed, who happen to be using limited companies as a legitimate vehicle.”

If caught by IR35, such individuals would be obligated to pay the ‘employee’ rate of income tax and NICs. This can reduce net income by up to 25%.

“Why on earth pursue such a draconian measure?” says Fell. “This is the worst implementation of tax recovery we’ve ever seen. It’s destroying people’s lives.”

With the latest implementation of IR35 measures having been brought into effect in April, pressure and backlash from across the industry is once again mounting.

For instance, a recent paper published by the Loan Charge APPG (a parliamentary group formed to challenge tax legislation in the UK) calls on the government to amend the “deeply flawed” system.

“I think it’s an area that’s really ripe for review and overhaul,” says Claire Scott, legal director at law firm Pinsent Masons.

“Uncertainty breeds risk and it breeds cost, and in a situation where were are trying to kickstart an economic recovery, I think more clarity from the government would be welcomed.”

However, some parties argue that an entirely different approach is warranted.

Judith Freedman, professor of tax law at Oxford University, argues that whilst “the onus is on the government to change the system”, continuing to ‘fiddle’ with tax status would be misguided.

“The solution is to move away from employment definitions for tax purposes completely,” she says. “You’re never going to get it right for both tax and employment law.

“There’s no reason why, just because you are controlled by your employer, that your tax should be greater than if you’re not. And the benefits employees get as a result of paying greater contributions are not commensurate with those higher payments. Those tests are not suitable for tax.”

Freedman also reveres the recommendations of the Taylor Review as a logical starting point.

However, Ed Bowyer, partner at law firm Hogan Lovells, rejects the idea of overhaul entirely, arguing that the current tax system is functional and fit for purpose.

“I don’t see any particular group being unfairly prejudiced,” he says. “From an employment law perspective, you can bring a claim and the tribunals will sort it out quite quickly.

“It’s working at the moment, and I simply don’t see huge swathes of money and time being lost. Could it be better? Yes. Do we desperately need to fix it? No, I’m not convinced we do.”