The way we work is changing; whether you call it contracting, the gig workforce, or off-payroll working, contingent labour is reshaping the way we work. Barry Murphy, Partner at PwC, discusses what this means for businesses, individuals and the tax system with Julian Sansum, Partner and Employment lead at PwC, and Juliet Stuttard, Director of Workforce Transformation at PwC.
Hello, I am Barry Murphy, a tax partner at PwC, and welcome to the latest edition of our talking tax podcast.
Today, we are going to talk about the future of work, and in particular, the whole issue of contingent labour. Whether you call it contractors, contingent labour, or off-payroll, what does it mean for business, what does it mean for individuals, and actually what does that also mean for the tax system?
I am delighted that today I am joined by Julian Sansum, who leads our employment practice and is also leading our whole efforts at PwC in this area of contractors - how business deals with them and how government addresses the issue and is consulting widely on that - and also, Juliet Stuttard, who is a director of workforce transformation at PwC, dealing particularly with large scale workforce transformation, both in the public and the private sector.
So, Julian, Juliet welcome.
Julian, if we turn to you first, contingent labour, what are the statistics, what’s the growth in this off-payroll working...why should we be worried?
Barry, years ago, we would have seen that most large organisations employ most people. These days, we are seeing an awful lot more of the front office, as well as the back office, be put out to be contingent labour. In the last 20 years, we have seen an increase in the self-employed, from about 3.3 million to 4.8 million. We have now got over a million personal service companies and that’s one of the ways that contractors contract with organisations.
We are seeing huge growth across the whole piece. We expect that growth to continue. Most organisations are telling us it’s for the need to be flexible and be able to go after things quickly and make rapid changes. When they need to adapt to new technology, they will often look to the contractor market first. At the same time, a lot of people like working like that. They like the freedom and flexibility it can bring them. There is a whole contractor culture that has built up and it works for them as well, so it works on both sides.
Does that mean that the new employment growth is more contractor or contingent driven but still the largest chunk is that we have a lot of regularly employed people?
Most people are regularly employed within the UK, but the biggest area of growth has been the contractors and other self-employed categories over the last few years. We can see that when, for example, we look at the tax side where about 85% of tax revenue comes from the employed sector and about 15% from those who are not employees on the income tax side. So, employees are still by far and away the largest part of the working population in the UK, but the contractor market is very important. When you read a lot of what the government has been saying and also what Matthew Taylor has been saying about the UK economy - having a flexible labour market is very important for us as we adapt. We’ve probably got one of the most flexible labour markets in Europe.
Okay, so it’s about the growing trend and where does that lead us, rather than the here and now. Juliet, you work a lot with the public sector as well, are you seeing the same trends there?
Yes. IR35 was in place in the public sector from 2017, so over the last couple of years, it has been subject to that. What I’ve seen is, many organisations react in the very short term by actually employing those contractors who have the largest skill set, although if they lost them, they would lose DNA from the organisation so there is a short term reaction. But the long-term reaction is for them to really think about their workforce size and shape, and to really think about what they build, what skills they build, what they borrow from other places, and what they buy in. So, it’s really forced a change in behaviour with a long-term drive to think about the workforce, which is really positive.
Juliet you mentioned IR35. Julian, could you explain what that is?
It confused me for years Barry.
It’s a bit of tax legislation that was brought in specifically to look at contractors. What the initials mean? It was brought in in the 1999 Budget. We used to have the inland revenue back in those days and it was inland revenue press release number 35, since then it’s got this big life to it, which confuses everyone. But what it basically said was, ‘if you work for an organisation, and there is an intermediary, so you work through a company or through something else for that organisation, for the purposes of determining whether you are an employee for tax or self-employed for tax, you ignore the intermediary company.’ So, if you are inside IR35 as it is called, you should be taxed as an employee, or outside means you should be taxed as self-employed.
So, that brings up this whole issue of who is employed and self-employed. You made it sound very easy as to how we determine that, is that right?
It’s a good question, Barry. It’s the subject of many tribunals, cases, etc. In the UK, we don’t have strict definitions in terms of numerical tests or absolutely specific statutory tests around this, lots have been built up through case law, and there are a lot of grey areas in terms of whether someone is an employee or not. There are certain key tests, which will be applied, and often if you look at someone doing the same sort of job under the control of an organisation, they are probably an employee; or if you look at someone who is fully independent and can make their own decisions, supply other labour, and they are not really under control, they could be self-employed, but there is a big grey area in between. Certainly with the way that working practices have merged, some of the understood definitions have been tested. So, take the gig economy for example, that’s a whole different way of working. Now technically the gig economy has been around the donkey’s years, but the way we do it now through apps is a recent development, and the tax law and the labour law haven’t really kept up with the way those things work.
I was going to say, when you say there are lots of grey area from moving more into gig economy, people having bright lines, is going to help more. So, we may come back to that theme. Juliet, what are the overall IR35 changes driving in terms of organisation design?
We have mentioned that organisations need to remain agile and they need to be adapted to their markets and their clients and that is fundamentally driven by their organisation design. Again, from the public sector view, we’ve seen a lot of organisations refocus their organisations looking at their role descriptions, looking at how they quantify jobs, and saying, ‘actually, let’s have broader, more flexible job opportunities that both can be done by permanent and core workforce or by contingent labour.’ The other thing is, looking at the balance between contingent labour and core [labour], and what we have found is many organisations typically employ contractors for say a year, but actually some employ them for more than that. So, they’ve really got to look at the balance of their workforce, and almost over time, how they create an organisation design that works for them in the longer term; so really looking again far into the future.
You are saying that sounds like a change and you said earlier, we have got a little bit of short termism sometimes, this is about fundamental design. Do all of these changes then, Julian, mean the business case for whether you use contractors has changed?
Yes, I guess I should just backtracking slightly, to say what the changes are on IR35 that we’ve got coming in, they are all around making sure that organisations start to do the assessment themselves of whether somebody should be self-employed or employed, and there are different implications for costs. Our view is, it does change the business case a little bit, but the fundamental driver between whether you use contingent labour or not, is the business need and the need to be flexible. Organisations we see having more than half of the workforce is contingent labour. We’ve done a recent survey, where only 21% said the cost was the key driver. It’s flexibility which is the key driver here, Barry. So, if you needed someone last year, I suspect, you will still need them to be flexible next year, even though there might be a margin increasing cost going forward.
The business case does need to be looked at, but the fundamentals as to way you would have contractors rather than regular long-term employees are still there and still very important in the UK.
Maybe from both of you, do you see that balance continuing to shift? Do you continue to see a growth in contingent off-payroll workers and maybe a reduction in the regularly employed workforce as we mentioned earlier? Do you see that balance increasing overtime?
I do, because I think that comes from individuals themselves. As Julian mentioned, people like this way of working, and the newer generations coming into the workforce, they like flexible portfolio career when they move in and out of organisations, it’s not like they are employed by one organisation all their life. So that is driving, it’s not just legislative, it’s not just tax change, it is actually being forced by people wanting a different type of career.
The way I see it, it almost comes back to the fundamental question of what the company is there for. Is it a collection of capital that is then deployed in a most efficient way? As we get new services, new products, etc., if we get new businesses spring up, they are likely to adopt a much leaner process to go to market. The only way you can really compete with that is to also have a lean process, which implies you need to have a lot of flexible labour, and contractors will be a key part of that flexible labour pool.
So, the future of work to a more flexible pool is growing all the time. The tax system itself, Julian, is designed for regular employment that feeds the current pension system. What do you see are the biggest challenges for the overall tax system in dealing with this and the way forward?
So, 45% of UK tax is from income tax. 85% of that is from employed or pay you earn. That’s a big piece of what the UK needs to be funded. In the self-employed world or contractor world, the view of the government is that individual contractors have not always necessarily applied the same rigour as to whether they should be taxed as employees or not as a company might do, and the tax change is all around getting companies to take responsibility for that going forward. So, that will drive some change, but the need for the flexible worker is there in the big time.
I think, another angle to think of is the benefit side, and if you think about Taylor’s good work, and all of those proposals, that’s all about protecting some of the lower paid workers in the UK workforce.
As we get more flexible and agile workforces, how do we ensure they have proper rights - they might not be employees, but how do you get rights packages, redundancy packages, maternity pay, sick pay? How do you get that working for them when they are not necessarily going through a large organisation? I think that would be a big focus going forward.
As you said, Juliet, there is a fundamental rethink of that whole strategy for the economy, not just for individual businesses. So, maybe a quick question before we close for both of you, you are in front of the class-room today and you are asked, ‘should I be a contractor or any employee,’ what would your answer be?
It’s whatever works for you. I think, it’s increasingly relevant for people in very many stages of their life to think about that, and actually sometimes, it’s not as effective for you to be a permanent employee, particularly if you’ve got caring responsibilities or you want to do something else with your life. So, I think it has to be right for you, and I think it’s becoming more and more evident that people are doing that at different stages of their careers.
I think that’s a great point to finish on. It’s understanding the options, the reality of them, and I think you’ve both, Julian and Juliet, have given us plenty of food for thought today. Thank you very much for that.
I think some of the immediate challenges are around how do we all contribute to the thinking of protection of worker rights, how the tax system needs to develop to raise what we need to fuel society, the type of society we want, and I don’t think there are any very quick answers. But thanks for helping us to explore the issue of the future of work and contractors in the contingent workforce today.
Thank you very much for listening. I hope you enjoyed the podcast. Please engage and leave any comments you have on the topics that we discussed today, and subscribe so you can listen to our series of podcasts on talking tax.