ACCA is pleased to respond to the consultation set out in the document of the above title of October 2011, focusing on the wider policy issues touched upon by questions 5, 6 and 7 of the consultation document. ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management.
We support our 147,000 members and 424,000 students throughout their careers, providing services through a network of 83 offices and centres. Our global infrastructure means that exams and support are delivered - and reputation and influence developed - at a local level, directly benefiting stakeholders wherever they are based, or plan to move to, in pursuit of new career opportunities.
ACCA supports HMRC in its attempts to ensure a level playing field for all businesses and tax payers within a fair and efficient tax system. As a part of this, the structure operation of the tax and benefits system should be designed to ensure that benefits accrue to those who are entitled to them, and that this entitlement can be clearly and efficiently established. ACCA is in favour of the repeal of the legislation as proposed in the consultation document on grounds of simplification and reduction of administrative burdens.
The UK welfare system, and the funding for it, has its roots in legislation and policy dating back to the earliest years of the 20th century. The changes in society and working patterns since then, and the scope of benefits provided by the state, have been immense. The competing pressures on the statutory framework have resulted in a complex legislative environment, and the challenges to administrators have increased as the social and economic environment in which they operate has developed. Even the specific legislation addressed by this consultation, which is little more than thirty years old, is operating in an environment which the original draftsman could never have contemplated.
The UK system of National Insurance in relation to employees operates broadly to provide rights to pension and unemployment benefits in return for contributions paid by both employee and employer. Separately, employment law provides that employees are to benefit from certain rights and protections, many of which impose a direct economic cost upon the employer. These two factors can result in a perceived economic advantage to a business of engaging workers on a self-employed basis, rather than as employees. A similar perception can arise on the part of workers, and may be fostered by businesses who seek to ‘share’ the economic saving and engage individuals on a self-employed basis for tax purposes.
However, as the consultation paper rightly points, out, employment status in the UK (whether for tax or employment law purposes) is derived from the facts and circumstances surrounding the engagement in preference to the form of words used, or the professed intentions of the parties. The effect of the categorisation regulations is to remove the need to apply that test for certain workers and deem them always to be employed, and hence liable for Class 1 National Insurance contributions on their earnings for qualifying engagements. Historically this had two principal impacts. It established the entitlement of qualifying individuals to benefits at a certain level, and did away with the burden of establishing status for National Insurance purposes.
With the passage of time, the importance of the entitlement issue has faded for all but a tiny proportion of taxpayers. The application of the categorisation test has on the other hand become significantly more difficult as changes in the economic, legal and social landscape have combined to potentially bring a far greater proportion of the working population within the ambit of the regulations. A test which had been comparatively simple to apply for a clearly defined population may now apply to a far wider population. Defining that population is in itself problematic, as the legislation was not written to fit current practices. Large numbers of taxpayers should therefore be considering a test which, even if passed, is not thought likely in most cases to confer significant added benefits upon them, but will impose an additional administrative burden.
ACCA advocates the ‘sunset clause’ principle in particular for anti-avoidance legislation, but the principle applies equally to all areas of tax legislation. There needs to be a positive prompt for justifying the existence of legislation, and outdated laws should be removed. While consideration still needs to be given to the needs of those who may otherwise be disadvantaged by the interaction of tax and employment law with the benefits system and the wider economic landscape, (and we are aware of other HMRC initiatives in this regard) the potential administrative burdens imposed by the categorisation regulations as they stand mean they are no longer an appropriate part of a simple, certain and efficient tax system.
There are many wider issues raised by the subject matter of the consultation, such as the desirability of tax neutrality between employment and self-employment, or the influence of tax policy on choice of business vehicle for small business. While these are beyond the scope of the response to this consultation we would welcome the opportunity to discuss them further with you and your colleagues from HM Revenue and Customs and HM Treasury.