Treasury Committee explores employment taxes
The House of Commons Treasury Committee held a hearing on Tuesday 20 October into employment taxes, as part of their Tax after Coronavirus inquiry. Witnesses were Bill Dodwell, Judith Freedman and representatives of the CBI and IPSE.
The Treasury Committee is carrying out an inquiry into ‘Tax after coronavirus’. This is a comprehensive examination of the UK tax system, looking at what the major long-term pressures on the system are, what more the UK can do to protect its tax base from globalisation and technological change, and whether such pressures should be met with tax reform. The Committee are also seeking evidence on what overall level of taxation the economy can bear, the role of tax reliefs in rebuilding the economy, and whether there is a role for windfall taxes in the post-coronavirus world.
Read the full transcript of the hearing (on which this summary report is primarily based)
Committee members present: Mel Stride (Chair); Rushanara Ali; Mr Steve Baker; Harriett Baldwin; Anthony Browne; Felicity Buchan; Ms Angela Eagle; Siobhain McDonagh; Alison Thewliss.
Witnesses: Professor Judith Freedman CBE, Professor of Taxation Law and Policy, Faculty of Law, University of Oxford; Bill Dodwell, Tax Director, Office of Tax Simplification; Derek Cribb, Interim CEO, Association of Independent Professionals and the Self-Employed; Andrew Titchener, Head of Tax Policy, Confederation of British Industry.
Potential for tax increases
The chair, Mel Stride, began by questioning Andrew Titchener (CBI) and Derek Cribb (IPSE) about possible future tax increases. “The time for any tax rises is not now,” said Titchener, observing “we are still in a crisis phase at the moment”. “[T]he important thing is that we need to encourage business to invest and create jobs,” he said. Tax rises deter investment. Asked whether it would be better to raise £5-10 billion a year through corporation tax or through employment taxes he would not be drawn. Stride said he got the sense “that businesses feel that that tax is pretty internationally competitive, and that if the Chancellor were to hike that tax in the future there would not be a lot of squealing around that.” Titchener said any rise in the headline rate of corporation tax impacts business investment decisions, though the rate should not be looked at in isolation: reliefs and incentives are important too.
Cribb said that, following a ‘pretty tough six months’, the self-employed would not be comfortable with any tax rises. However, “if there were to be a rise in corporation tax, it would be good to see a differential rate to support the smaller, more entrepreneurial businesses for the self-employed. That has been done in the past and we would look to it again as a way of supporting those who are effectively least able to get through this crisis.” He suggested putting VAT on financial services and targeting ‘global businesses’ could help keep the tax burden down on the rest of industry. Stride was doubtful much could be raised from ‘the Amazons, Googles and Facebooks’. “You are talking about £1 billion here or there. It is not going to suddenly transform our ability to spare others taxation rises.” Stride pressed Cribb on which tax, in a forced scenario, would be ‘least uncomfortable’ for the self-employed, but Cribb, like Titchener, would not be drawn into giving a view.
The chair turned to Bill Dodwell (OTS) and asked him for his view on raising rates rather than thresholds. Rates spread things more broadly, said Dodwell. “If you lift thresholds, you take some people out of the tax or national insurance net, but at the same time because of the strong link with benefits people at the bottom of the distribution do not necessarily get the benefit from all that. The benefit mainly goes to people in the middle of the distribution, not at the top, because it is withdrawn.”
Judith Freedman (University of Oxford) was asked whether the government should be looking at pension tax reliefs rather than income tax and national insurance rates. She did not see them as alternatives. “[L]ooking at rates in isolation does not work well. You have to look at broadening the base as well. If you are looking at broadening the base, people in receipt of pensions should be within your purview because they are not paying any national insurance on those pensions.” She did not think it will be popular, but thought it probably should be done
Impact of coronavirus
Another former Conservative minister, Steve Baker, took up the questioning, and began by asking Derek Cribb whether “some of the people you represent are going to be dismayed if they end up paying higher taxes when they did not get a bail‑out because they were just over the £50,000 limit”. Cribb said the £50,000 limit was just one of the reasons people did not get a bail‑out. Others included the recently self‑employed and those who pay themselves predominately by dividends. “Effectively, one in three of the self-employed population have seen no support whatsoever. As you say, the idea of them having to pay tax to fill the coffers that have been emptied out into other people’s pockets is a little challenging to sell to our members.”
Baker noted that the CBI’s written evidence to the committee had speculated about employers allowing people to work from home outside the UK. “Should the Government try to stop jobs being offshored”, he asked. Titchener said the point the CBI was making was that the tax system potentially has to adapt to this (so far anecdotal) trend. He explained that it was not a broad point about jobs offshoring but about people choosing to work from holiday homes. Issues the CBI had identified already included a corporate issue around establishments and corporate residence: “Are those people creating a taxable presence for their employer, where perhaps their employer did not have one before?” He said there had been some welcome OECD guidance saying that should not necessarily be the case. On the individual side, he saw issues of individual tax residence, individual payrolls, where they should be on a payroll and what taxes and social securities they should be subject to. “You then move into a realm where perhaps, if you have a much greater dispersed workforce in a large multinational organisation, they could be performing duties in places all over the world and a mix of duties in respect of lots of different countries. I am sure that this happens to some degree already in some respect, but there is the potential for this to increase to the point where it becomes a fundamental issue to address in labour taxation.”
Bill Dodwell thought there had been a proliferation of this, including before the pandemic. “You see various platforms offering services as well as selling goods. All the focus has probably been on goods, holiday homes and that sort of stuff, but we should not forget that you are now seeing platforms supplying services. There is a real question for tax authorities generally on how you enforce taxes in this situation.” The OECD’s work needs to be accelerated, he said, adding that it is not just about employers, it is also about freelancers operating internationally. “The question is then whether you should tax where the services are rendered as opposed to where they are performed and how you deal with the enforcement question.”
Baker asked Judith Freedman how she thought changes in the labour market after coronavirus will change the way that taxation should be applied. Freedman suggested it would probably further increase the gig economy and platform working. “We need to tackle the position of people who are working for more than one engager or working through platforms. Those things needed to be looked at before the pandemic, and we now need to look at them even more urgently.”
Level playing field for employed and self-employed
A newer Conservative MP, Anthony Browne, observed that the self‑employed are taxed less heavily than the employed, particularly because of employer national insurance contributions (NICs). Is there a rationale for this, he asked. No, said Judith Freedman. “There is some small difference in rights to benefits, which accounts for about a 1% difference, around parental leave and jobseeker’s allowance. Beyond that, there is no good rationale.” The tax system should be neutral between different legal forms of working, so as to not distort the market, she said. If the argument is about encouraging entrepreneurship and rewarding risk-takers, targeted grants and incentives for investments (eg keeping the annual investment allowance high) would be a better approach than a blanket relief to all self-employed, she thought, noting that some self-employed take on risk, but some take on very little or none.
Derek Cribb disagreed with Freedman on some points, saying tax was a ‘blunt implement’ for differentiating between types of risk, but “it is the only one we have. Yes, there is a differential that needs to be there. We do need to encourage the entrepreneurialism.” He challenged the premise that the self‑employed want the same support and safety nets as employed people, saying “[a] large number of the self‑employed are more independently-minded, risk-taking and entrepreneurial.” “[W]e need to look outside the normal economic 10-year cycle, or whatever it might be, where I do not think most of the self-employed would look for support from the Government. Coronavirus is more of a one-in-100-year event, and with that everybody needs a bit of extra support.” Reducing the gap between employment and self-employment would distort the UK’s flexible workforce, he warned. Pressed by Browne, Cribb said the tax differentials between employment and self-employment were ‘quite small’. “The difference is not in what the employee or the contractor is paying. Quite often, the difference is in the employer’s NI… [I]f I was looking to close the gap, I would look at some contribution from those who engage contractors, as almost a proxy for the employer’s NI, rather than trying to increase tax and NI on the contractor.”
Andrew Titchener said there that while cost differentials are taken into account when employers are making decisions, “there are a huge range of reasons why an employer would engage with someone as a contractor or as an employee, around the type of work you are doing, the sector you are in and the sort of project you are doing.”
Bill Dodwell said that, economically, there should be “a much closer alignment of overall tax burden [but] it is not easy to work out the best way to get there.” Many freelancers provide their services via a company, he noted. He argued for a statutory employment test. “I do not just mean taking the existing, muddled case law and trying to turn that into statute. I would suggest that Parliament needs to pick this up and ask who exactly we want to be treated as self-employed. Once we have worked out the answer to that, and we would need to take a lot of evidence, we would then need to come up with a statutory test. That way, you would have everybody in the whole mix knowing which side of the line they rested on.”
Defining employment and self-employment
Questioned by Labour MP Angela Eagle, Judith Freeman said we might need to “look outside the box and move away from employment status as the test of how we want to tax people.” “[T]rying to get a test that is the same for tax and employment law is trying to kill too many birds with one stone,” she argued, “because employment law and tax have very different objectives. Focusing on tax and having a definition, as Bill said, that looks at what we need to do from a tax point of view, who we want to tax through collection at source and who it is practical to tax through collection at source, without worrying about whether they are employed or self-employed, might be the way forward.”
Eagle worried about ‘huge unfairness and exploitation going on in employment law’ in relation to those on zero hours and fragmented hours contracts.” Freedman said it was a ‘myth’ that you cannot have flexible employment. “If you are trying to solve the very real problems of employment law and tax law with one definition, you are going to be very disappointed because those problems are different.” Regulation was the way to protect the vulnerable, she said; that is a different issue from how we tax. For an engager, both tax and employment law incentives push them towards trying not to take on employees, she explained. “If that were to change so that the tax was neutral, we could look more clearly at the employment law to see whether someone should have certain protections.”
Derek Cribb said IPSE broadly support the Taylor report and had been surprised that more progress has not been made. He is not convinced that employment law and tax treatment can be looked at in parallel. “Two separate exercises doing that in parallel will almost certainly not connect at the end. From our perspective, let us get the definition in there, if we can, and from there see if we can harmonise tax treatment to employment status.” Eagle queried whether that approach might not retain the system’s ‘incredible complexity’. Cribb said certainty was important, but “not something you can take a shortcut to”. He noted that HMRC, in trying to enforce IR35, seems to lose more cases than it wins.
Eagle asked Bill Dodwell if people on building sites should be deemed as employed, rather than self-employed, “when it is fairly obvious that they report to the same site and work for the same people?” Dodwell said his personal experience of working on a building site suggested it is very possible to be a self‑employed person under the current law in that category. He noted that that sector has a withholding tax to ensure compliance, under the Construction Industry Scheme. He summarised: “The bigger the tax and national insurance difference you have between the various ways in which you provide labour and services, the more economic encouragement there is to shift into the lower-taxed version of it. If you did not have that difference, people would end up working the way they wanted to work, untainted or un-pushed into it, if you like, by tax.”
Mel Stride asked Cribb whether moving to a tax neutral situation between the different structures of employment, if IR35 could be removed at the same time, would be a price worth paying? Cribb repeated that we need to “keep the incentive there for people to be entrepreneurial and self-employed, and less reliant on government support.”
The gig economy and platforms
Labour MP Siobhain McDonagh put some questions on issues around the gig economy. According to published statistics, workers in the gig economy are younger than the general population and they lack employment rights. In these circumstances, is it right that they should be taxed differently than employees? Judith Freedman said there is a need to “look at the way we tax those people who are working, often for many different engagers, separately from the way in which we protect their rights. [But] they should be paying tax and national insurance in the same way as if they were employees”.
McDonagh asked about the 2018 OTS report on the gig economy. Bill Dodwell said the OTS had done further work since then. He said one point that had come out is that middle and lower-income people are keen to manage their tax better than currently. “During our inquiries, lots of people have told us that they would like to pay tax on a more regular basis so that they are on top of it and they do not have these gigantic, unexpected bills arriving at different times.” Responding to a reference to Uber by McDonagh, Dodwell noted that “almost all taxi drivers in the UK are self‑employed” not just those working through platforms such as Uber.
McDonagh asked Freedman to what extent the gig economy is “a result of the tax differential between employed and self-employed”. Freedman repeated that there are many incentives to not employ people, some of which are employment law incentives. “That is exacerbated by the tax. If we look at certain platform providers, it is much cheaper for them at the moment to operate through gig workers than to take those people on. In some cases we even see them offering to provide insurance and other things separately and privately, rather than paying the tax they could pay in order to provide those systems.” McDonagh worried the rise of the gig economy is leading to ‘a race to the bottom’ for a lot of her constituents. “Do we risk a two‑tier workforce or a two-tier labour market,” she asked. Freedman replied that we “risk a very distorted labour market unless we sort out the rights of these people” though that is a question for labour (rather than tax) lawyers, she added.
Andrew Titchener said employers would welcome clarity. “Judith mentioned that we have three different statuses for employment law and two for tax, each of which requires an independent determination. For every worker, you effectively need an employment, a tax lawyer and an HR professional to decide their status, which adds a lot of cost to the engagement.” The CBI supports proper rights for workers and enforcement of those, he emphasised, while trying to retain as much flexibility as we can in the labour market.
McDonagh asked whether further digitisation of business record‑keeping would help the Government to identify and tax those in the gig economy. Dodwell replied that digitalisation offered a lot of opportunities, including provision of information by third parties, and that HMRC considers that digital record‑keeping reduces careless errors. OTS would like to see a much improved personal tax account and business tax account, he said, so people “can see and manage their tax affairs and correspondence with HMRC, make payments much more easily than currently and make claims for tax reliefs. All of that would support a much better approach and take real advantage of digitalisation.” It would cost money though.
The MPs returned to the gig economy and platforms later in the session. Labour MP Rushanara Ali challenged Dodwell over Uber, saying there is “a big difference between a company like Uber, worth £50 billion to £70 billion, and the local cabbie down the road in a constituency”. Dodwell replied that an OTS report in October 2019 said that there was a real case for information provision and even possibly considering withholding in a market where there are a whole range of engagers and, typically, the individuals providing the services do so through the means of an engager. “It is exactly the same dealing with a global company on a platform, a very large private hire firm primarily based in the UK or Ealing taxicabs. When I want a taxi, I phone up a taxi firm. I do not phone up a particular driver. You should look at that market situation and whether there are intermediaries or third parties there.” The market for holiday properties is similar, he added. Freedman agreed, saying there is a particular problem with platforms: “We tackle that problem with a set of definitions that work for that area and deal with it, both from a rights point of view and from a tax point of view, by looking at that particular set of problems.”
Relationship between income tax and national insurance
Felicity Buchan (Conservative) observed that, since 1980, we have seen a big shift towards national insurance (NI) and away from income tax. Why was this, she wondered. “The shift has come about for political reasons,” Judith Freedman replied, “to avoid raising the headline rate of income tax, and it has not really been thought through.” It has exacerbated the problems between the employed and the self-employed, she continued. Freedman argued for a merger of NI and income tax, though she noted the political challenges of doing this, as it would lead to an immediate jump in the headline rate of income tax. She noted NI is not a contributory system any more. Asked about tax consequences of a merger, Freedman said the biggest problem would be the employer’s contribution. “[T]hat would have to be thought about very carefully, along with whether you continue wanting to have an employer’s or engager’s levy.” Employer’s NI raises too much to just be scrapped, she said, adding that it might need to be replaced with another business tax such as increased corporation tax.
Andrew Titchener said employer’s NIC was just over a third of the total tax contribution businesses paid last year. “If you move that tax burden towards corporation tax, you are likely to have less effect on employment incentives but you might have more effect on investment incentives in other areas.” In terms of merging the two, it would be welcomed if it is a genuine simplification, but it would depend on precisely how it is done.
Derek Cribb said simplifying the tax system by merging employee’s NI with income tax “makes a lot of sense, and then perhaps looking further at the employer’s side or the employment levy, whatever that might be, whether that is the employer’s NI or some engagement levy for contractors. I can see benefits of there being a lever there that Government can pull as and when required, which the economy drives. Certainly, merging the employee side of NI is something we would go for.” He did not think the barriers to engager’s NI were insurmountable.
“If you were to have an engager levy, it would only apply to part of the market,” Bill Dodwell pointed out. “I would suggest that it does not look conceivable that, if any of us invited a plumber to come and fix something in our house, we would take off some tax and send it to HMRC. On the other hand, if you have a bigger plumbing firm that engages a lot of self-employed plumbers as part of that, it might have an engager levy. That is an illustration of the complexity around all that.” The OTS had looked at merging the base for NI and income tax in relation to employment income only. (NI does not apply to pension income or investment income and moving to extend it to that would mean a substantially higher burden for pensioners, he said, though he noted that about half of the UK’s 12 million pensioners do pay some income tax.) There would be about 7 million winners and about 7 million losers from that merger, he said. Examples of people who might lose are people with multiple part-time jobs. People who receive a bonus might end up paying more or less NI depending on where they fitted in the threshold. And you would have to reconcile the £12,500 personal allowance for income tax and £9,500 NI allowance. If the Government wanted a merger they would need to do it in small steps, he thought.
Limited companies and dividend taxation
Alison Thewliss of the SNP asked whether the increase in incorporations of businesses in recent years was motivated to any extent by tax. Yes, at least in part, said Judith Freedman. Bill Dodwell explained that owners of companies, particularly smaller ones, “can manage their tax, not unreasonably, to minimise the overall tax burden. For example, they do not take dividends if it would put them into higher-rate tax. They wait a year and take it when they might end up with a basic-rate tax burden.” Derek Cribb, however, said he did not think any of the studies in this area had suggested that reduced tax was the primary reason for incorporation. Quite often, No. 1 on the list is protecting your personal assets, he said, adding that business credibility is another significant issue, and some organisations will only engage people working through a limited company. This is because the current system relieves the engager of responsibility in this situation, said Dodwell. Freedman said it was true that people usually put limited liability at the top of their list, but this can often be illusory because most people will have to “put their house on the line anyway to borrow any amounts of money”. The extent to which you get limited liability protection, if you are just providing services, is very small.
Thewliss noted that the tax system tries to avoid double taxing dividends with income and corporation tax. “This used to be done with a tax credit at the basic income rate. It is now done with an upfront lower rate of income tax on the dividends. Which system do you feel is the better system and is there a case for further change?” Dodwell said this was a difficult question. “The reason we have the system we currently have is because the imputation system, the one of giving you a tax credit, did not work at all for companies that invested overseas, paid tax overseas on their profits, then brought them back to the UK and tried to distribute them.” “Given the international scale of things, we are probably better off with the so-called classical system, where, essentially, you have a lower rate to assume that tax is borne in the company,” he concluded.
Thewlis also asked about the OTS proposal in 2016 for a sole enterprise personal assets (SEPA) vehicle. Is that something OTS would still like to look at? Things have moved on, said Dodwell. “In response to that perceived demand for limited liability but not needing the complexity of a company… [the] Government are not interested in taking that particular issue forward.” He added that putting ‘yet another thing into the mix’ would probably bring its own complexities. Derek Cribb said IPSE had looked at SEPAs and proposed something called the freelancer limited company (FLC). “These are both ideas as to how we can simplify the tax system for those who are self-employed but also potentially protect their assets, so looking at a particular, almost light-touch, form of incorporation that gives that level of protection and allows you to think about how surpluses might be distributed out of that entity in a much more simplified way.”
Ultimately, three of the four panellists were cool on the idea. Andrew Titchener warned that, “if you are going to bring something like that in, you still have the same problem of deciding who is allowed to set that kind of vehicle up.” Freedman said she could not see how introducing another vehicle would improve this situation: “Creating a new form seems to me to be definitely a complification, as I would say, rather than a simplification.” Dodwell said OTS agreed with that. “It is very quick, simple and cheap to set up a UK company, but work the OTS has done has found that lots of people starting up in business do not understand the difference between a company and themselves. It is that sort of complexity that they struggle with, together with accounting.”
Off-payroll working (IR35)
The committee moved on to IR35. Andrew Titchener said there is real concern about the fact that changes coming up are moving the burden of enforcing the tax system from HMRC to employers. “We have had some anecdotal feedback that those conversations can be very difficult, where contractors do not agree with their determination for whatever reason.” The CBI are starting to hear from employers that, because of this change, some employers are saying, “We will not engage with contractors any more” because they now deem it too risky, complex and expensive. “To me, that seems to be the worst of all worlds in many respects. It seems to have increased the complexity, difficulty and costs for employers and, at the same time, decreased the flexibility that the labour market has”.
Derek Cribb agreed with Titchener. He flagged that 500,000 people have ‘fallen out of self-employment’ in the last six to nine months. “Normally, in a time of economic crisis, you would see more people going into self-employment. We are seeing absolutely the opposite and now we have a piece of legislation coming in, in the new year, when we want to encourage that flexible resource, which is disincentivising it.” He would like the reform scrapped altogether, as recommended by a recent House of Lords report. Why had the Government not picked this up, wondered Alison Thewliss. “I could not hazard a guess,” said Cribb. “Possibly one of the reasons why the Government persist with it is to collect tax,” commented Mel Stride drily.
Thewliss asked Bill Dodwell how he would prevent tax avoidance within the current parameters of the system. Two points, said Dodwell: narrowing the differentials between the various taxes on labour income, and a new statutory test of employment, so people have a much clearer understanding of where they sit on the boundary. “We are not saying you should enact a piece of statute to encompass the current, very muddled case law system, which leads to disputes… You do not benefit from having cases go all the way to the Supreme Court as to whether somebody is or is not a worker.” What would the tests be? “There might be some professions or trades… where you say, “This sort of thing is fundamentally a thing of self-employment”,” said Dodwell. “You might ask yourself, “Does the individual spend three-quarters of their working time working for a particular engager?”… When we brought in a statutory test for tax residence for individuals, we spent three years… asking the questions of how we should approach that. We should do exactly the same sort of thing in this area too.”
Judith Freedman said it was a mistake in the original design of IR35 that it was based on the case law. “As people have said, the case law is muddled. The case law is nuanced and complex for a reason, and that is because it is very fact-based. Different facts give rise to very different decisions.” She challenged the idea “that we can come up with a simple difference between the employed and self-employed that everyone will agree and that will work for every purpose” saying it “sounds wonderful” but “[e]ither you would have a very rigid test that looked at how long people had worked for a certain engager or not, which would be very easy to manipulate and play around with, or you would end up with a nuanced test that would end up having as much baggage as the case law… The simpler the test, the easier it is to engage in creative compliance and to play the system.” Taylor recommended control as a test. But that would be ‘disastrous’ said Freedman “A brain surgeon can be an employee and yet he is not controlled in the sense that some of the case law talks about. There is not a simple test or simple difference between the employed and self-employed. Just by saying we want there to be, it does not mean we can create one.”
Tax administration and digitisation
Rushanara Ali asked about the downsides of the digital agenda and how they could be addressed. Bill Dodwell (OTS) said expanding Making Tax Digital (MTD) to income tax, and imposing requirements on non-VAT registered businesses for the first time, will present a challenge. He suggested it would be better to ‘start larger’, proving the system at the top end, with people already using digital systems, and only then move on to people who are introducing digital accounting systems for the first time. “You would also need a system of, essentially, combining information. For example, if you have a self-employed person who owns a buy-to-let property and has some dividends or interest income, you need something that is going to take all those different sources.” Dodwell suggested cash incentives could be looked at. At the prompting of Lord Carter (who proposed back in 2006 that HMRC should lead the way in delivery of online services) the government had introduced cash incentives for businesses to submit data digitally. This “sent a really good signal and was not massively expensive” he said.
Dodwell said as well as thinking about microbusinesses, HMRC needed to think harder about larger businesses, for which MTD “is probably a completely unnecessary form of information gathering. Large businesses already provide very substantial information to HMRC and probably do not need to add to it.” He thought the current “sort of three years’ time announcement… ought to be sufficient time to allow the market to develop” especially “if we started with only part of the market… [to] help prove the robustness of the systems before extending them down to those for whom a much bigger change might be anticipated.” He thought it was hard to know whether HMRC will be able to adapt its systems in time, given all the other burdens it has.
Derek Cribb (IPSE) said it was important to keep in mind the extra burden that comes with being self-employed. People should not be compelled to collect and report data monthly: “Let us try to keep it as simple as possible for them, with quarterly rather than monthly submissions of data.”
Does digitisation help tackle tax avoidance, Ali asked. “That is impossible to say,” replied Andrew Titchener (CBI). The aim of digitisation is ‘absolutely laudable in many respects’, he said, but “[t]he only way it is going to work effectively for HMRC is if businesses have time to implement it properly and adjust to the new way of working.” Some government documents have suggested MTD is a simplification, but “[i]f you digitise the existing tax system, you are going to digitise all the complexity that exists within in. If you want tax to be easier, easier to get right and all that, digitisation is one step but looking at the tax system again and the complexities in there is also very important, if not more important than digitising it.”
Judith Freedman (University of Oxford) agreed. “You are not going to deal with avoidance without dealing with the underlying system and the complexities in the system that give rise to avoidance, particularly having lots of boundaries, which is what mostly gives rise to avoidance. The two have to go hand in hand.” She added that, “had we had more information in a better form available to HMRC, it might have been possible to exclude fewer people [from coronavirus economic support].”
The way forward
Former Treasury minister Harriett Baldwin (Conservative) asked the panel, if they had to choose “between simply implementing the results of the Taylor review, setting up a tax commission, setting up an independent review of off-payroll working or A N Other suggestion, what would be the one thing you think the Government should do?” Judith Freedman said we do need any more reviews. “We need to take some of the information and analysis that [the government] already have from the IFS, from the Resolution Foundation, from Taylor, and sit down with it, work out the best way forward and not think about this short term but slightly longer term.” Herself, she would merge income tax and national insurance. “If I cannot do that immediately, I would take steps towards doing that more gently. I would have a roadmap so that everyone knew which direction we were going in. I would get rid of IR35. I would not need it any longer because there would not be the vast distinctions.”
Bill Dodwell would look at the overall burden of tax between employment, self-employment and those who provide services via companies. “It will lead to a whole range of solutions and things to look at, but I would start off down that path and spend some time looking at how it would all work through. Alongside that, I would increase digitisation at HMRC.”
Derek Cribb said we needed to design a tax system that is ‘fit for purpose’. “I would be a great believer in going back to first principles. What are you trying to achieve? In the judgment of the experts, what is the right balance of personal versus corporate taxation? I would start from there.”
Andrew Titchener said any change to the employment status for tax should happen alongside the Taylor review. Longer term, he agreed on the need for ‘setting out where you are going’, and for proper consultation. Responding to a question about NICs he said they are embedded pretty well into business systems and he would not necessarily suggest they give a huge amount of administrative problems. “The problem arises from knowing when you need to withhold NICs or not because of the status problems. If you fix the status uncertainty issues, you help to reduce those issues with NICs.”
Baldwin asked what the OTS think should be done on NICs. Dodwell said “there is a real case that, if you are employed or self-employed past pension age, you should pay national insurance just the same as if you are under pension age.” This would not be a cost-free option for the Exchequer, as some people would end up accruing additional years’ benefit towards their pension. “Nonetheless, for us it looks like entirely the right thing to do.” Trying to have a simplified form of corporation tax, as opposed to imposing big company rules on miniscule companies, “would be a good thing to do before we consider any form of Making Tax Digital for corporation tax.” He welcomed the 10-year tax administration strategy from HMRC, and said that looking at additional third-party information to be provided into the system is a ‘really important’ way of helping regular people comply. On the employed, self-employed or company question, the Office for Budget Responsibility is talking about differences worth £5 billion plus a year to the UK economy, so it has to be picked up, he said. And we need to work extensively with the OECD and others to provide exchange of information. “As it becomes possible to provide those services from outside the UK into the UK, we need the information to understand what is going on, to decide whether it is taxable and so on, but so do lots of other countries.”
The chair, Mel Stride, closed the session, noting that there was no unanimity on whether the tax differences between employed and self-employed were justified, but both sides of the argument had been put clearly. “We agreed that serious distortions flow from this, both in the labour market and in, for example, the growth of people incorporating and working through small businesses, leading us all, unfortunately, to the dreaded IR35. I think we are all agreed that this is best abolished as soon as possible. It may be a case of doing it in a way that perhaps means it is redundant altogether because of tax changes, rather than just dispensing with it and the Treasury taking a rather large tax hit as a consequence.” The Chancellor had already signalled possible changes to the tax arrangements for the self-employed, he observed, making these discussions ‘particularly pertinent’.
By George Crozier