Interesting things are happening in the labour market, but nothing fundamental has changed. Yet.
There has been plenty of media attention in recent times on how our working habits are evolving and changing. And plenty of political scrutiny too. Against this backdrop, the Institute for Fiscal Studies (IFS) have published a report entitled ‘Tax, legal form and the gig economy’, which looks at how the UK labour market is changing.
Amongst the various reviews which are also ongoing:
So the IFS report is timely.
Based on their analysis, the vast bulk (85 percent or 31.5m) of the workforce remain in traditional employment while the rest (15 percent or 4.5m) work for their own business. Of those, 500,000 work via their own company (known as a personal service company (PSC)) and 4m work as sole traders.
While these splits may not be that far removed from long term trends, what is interesting is that a lot of the recent growth in the workforce has been attributable to the number working for their own business – a far higher percentage than one would expect given the 85 percent:15 percent split.
What is more, the proportionate rate of growth attributable to those working for their own PSC is even higher still; the number of PSCs has doubled since 2008.
More interestingly, the legal form adopted seems to be dependent on the industry in which the individual works, with sole traders more likely to be found in construction, retail, taxi drivers and legal and accountancy services, and PSCs tending to be found in the IT and consultancy services.
So what does this mean? Somewhat surprisingly, the IFS acknowledges that, while traditional sources of data are not set up to capture the gig economy, industries with prominent growth in self-employment are not associated with the gig economy. Fundamentally, the data is just not there at the moment to judge either way.
So to what extent could the trend be driven by tax considerations? The report goes on to consider the respective effective tax rates of employment versus self-employment versus PSCs. And while it does not attribute the trend to the tax differential, it does make the case that the lack of homogeneity in the tax consequences may be skewing how people choose to work.
The report makes the argument that such divergence in tax rates is not desirable and that the traditional arguments used to support such differentials (e.g. NICs for self-employed should be lower as they have reduced entitlement to benefits) are no longer valid.
The proposed solution, at least to the tax question, is to design a system of taxation which would tax returns to capital and labour at the same rate at the margin, without disincentivising saving and investing. But as the report acknowledges, this would require major reform over a number of years; it is not a case of piecemeal reform but systematic root and branch review.
It will be interesting to see what the various reviews mentioned in the introduction to this article recommend since they will all be reporting on broadly the same topic. And it will be interesting to see how the Government responds.
Perhaps it was recognised that wider reform would be required, with the Chancellor’s letter to the OTS, after declining to proceed with the alignment of Income Tax and NIC, stating that the Government would: “look at how it can ensure that the taxation of different ways of working and different forms of employee remuneration is fair, sustainable and efficient.”
Watch this space.
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