Tax experts call for action to address false self-employment in the UK labour market
Following a recent radio programme examining the potential scale and nature of false self-employment in the UK labour market, the Low Incomes Tax Reform Group (LITRG) is calling for HMRC and the government’s new Fair Work Agency to work together to address the misuse of self-employment status that threatens more than just workers’ welfare.
False self-employment – where individuals are labelled as self-employed despite working under conditions that more closely resemble employment – has always been a concern for LITRG.
But the tax campaigners say that the issue is now at risk of ballooning as a result of increased costs and obligations on employers resulting from the government’s Employment Rights Act and the emergence of new models of engagement and ways of finding work such as via freelance shift apps.
While genuine self-employment plays a vital and valuable role in the labour market, misclassification affects workers in many ways, from not having the certainty of having their taxes deducted under PAYE, to missing out on rights and protections like the national minimum wage and holiday pay.
Speaking on the BBC Radio 4 programme File on 4 Investigates, LITRG technical officer Meredith McCammond said it was “frankly ludicrous” that low-paid workers in factories, offices or shops were being classed as self-employed, adding that it was hard to see how false self-employment wouldn’t be used as a loophole by some hirers to avoid the raft of new measures coming in via the new Employment Rights Act.
Some of the measures being introduced through the Act include payment of statutory sick pay from the first day of illness, guaranteed working hours under zero hour contracts and a range of other rights available from day one of a worker’s employment.
Building on the points made in the broadcast, Meredith McCammond said: “In many cases, false self-employment is driven by a hirer’s desire to avoid tax and/or their obligations under employment law. For the workers who are affected, it does not just mean the loss of employment protections. They can be left navigating the complex self-assessment regime when they should be on PAYE. This system is designed to protect both rights – as things like statutory sick pay are tied to it – and tax compliance.
“For tax purposes, HMRC can tackle false self-employment by enforcing the correct operation of PAYE. However, in our experience, these powers are not used extensively in low-paid sectors. We recognise that investigations of this kind can be difficult, and that in individual cases the tax at stake may appear modest. But HMRC’s own strategy allows it to pursue smaller amounts where doing so creates a deterrent effect – and, taken together, the sums involved will be significant.
“In terms of rights, enforcement is largely reactive and usually happens only when an individual brings a claim before an Employment Tribunal. Given the barriers associated with this including cost, accessibility and confidence, many workers are left without effective protection. Low-paid workers, in particular, really need clearer forms of state enforcement around employment status and associated rights to help protect their positions.”
Meredith McCammond continued: “Because false self-employment cuts across both tax and employment rights, oversight and action must do the same. We are calling on HMRC and the new Fair Work Agency to work together on a coordinated strategy to address false self-employment and maintain confidence in both the tax system and the labour market.
“This is not just a question of ensuring that flexibility in the labour market does not come at the cost of fairness for workers. Effective enforcement of employment status would level the playing field for businesses that follow the law – and bolster Exchequer funds. As the labour market evolves and the new Employment Rights Act looks set to cause yet more distortive hiring behaviour, now would seem a really good time to properly tackle this issue.’’