The Office of Tax Simplification (OTS) has published a report into simplifying how to determine whether a worker is employed or self-employed for tax purposes.

The report sets out the current complex system (different tests for employment used for tax, employment law and pensions auto-enrolment) and make somes suggestions for what could be done to stremaline the area including:

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Better employment status guidance, in one place with more real-life examples;

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Help for individuals and small businesses on what action a business should take, and the documentation it should have, when engaging a self-employed individual, to preclude or reduce the burden of HMRCenquiries;

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Setting up a HMRC employment status helpline and allocating more resources to this area.

WHile the Office believes that HMRC's Employment Status Indicator (ESI) tool is a valuable resource, it needs to be expanded and protocols developed to make it more reliable.

Longer-term ideas put forward work include:

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Considering a 'safe harbour' approach where an employer relied on HMRC advice and was open about its arrangements;

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A possible 'de minimis' period of time or level of payment before employment status needs to be considered;

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The government conducting a full study into aligning tax and NIC rates as well as the benefits available for the employed and self-employed;

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Carrying out a feasibility study into a statutory employment test;

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Exploring use of a withholding tax for payments to the non-employed whose tax status is unclear.

John Whiting, Tax Director of the Office of Tax Simplification, said:

"The tax system is stuck in an out-of-date mindset. In the 1950s and 1960s the distinction between employees and the classic self-employed jobbing plumber was clear and easy. Nowadays working patterns are hugely varied, freelancing is a way of life for many and that simple split doesn't work often enough.

This causes uncertainty, risk and administrative burdens all round. We have heard from businesses about transactions being delayed or even abandoned due to the risk posed by employment status uncertainty.

This is a difficult area with no simple solutions. We identify both direct ways of simplifying things – such as streamlining definitions – and indirect ones, which would take the heat out of the issue. Some should be acted on in the short to medium term, others are promising routes to reform that warrant further work but which would mean major changes."

You can read the full Report here.