How different ways of working should be taxed was the topic in the latest CIOT/IFS debate, held at the RSA on Monday (20 March 2017)
An audio recording of the debate can be found at the bottom of this page.
IFS Director Paul Johnson opened the event by noting how coincidental it was that the CIOT and IFS arranged a debate on employment so soon after the Chancellor Philip Hammond had announced and then abandoned a rise in National Insurance contributions for the self-employed. Johnson said that the U-turn was the result of a ‘ludicrous’ triple-lock promise by the Tories.
Helen Miller, the IFS’s Head of Tax, used a graph to show that an employee earning £40,000 pays £12,146 in tax while a self-employed person on that pay would dish out £8,713 and an owner managed business £7,358. Miller said that employment rights are a transfer from employers to their employees, not a benefit given to employees by the Government. “Employment rights can be seen as part of the remuneration package”, she said. The common thinking is that low rates are a way to reward risks taken by entrepreneurs, but Miller said some tax incentives to encourage innovation, start-ups and investment are poorly targeted and come at the cost of creating ‘boundaries’ in the tax system.
Judith Freedman, professor of taxation at Oxford University, was not surprised that Chancellor Hammond had such trouble winning the debate on increased NICs because it was not presented as part of a wider package. She argued that it was essential to look holistically at tax, social security and employment law. However she also pointed out that these different forms of regulation have differing objectives, so that we should not necessarily seek a ‘one-size fits all’ solution. At the moment there are similarities between classifications for all three areas but also important variations. In particular the concept of worker in employment law is confusing and not recognised in tax law. “It is all very unclear”, she said. The idea that the gig economy is ‘some radical departure’ is nonsense’, the professor added, as we have had these problems for a long time. But the new ways of working do present an opportunity for technological solutions, for example by withholding using their platform. We should think about detaching the withholding obligation from the employment definition completely, she suggested. Alignment of social security benefits would help with that, Freedman argued.
Freedman’s view that the VAT threshold (£83,000) is too high surprised some in the audience, though others agreed. Looking at the issue in the context of digitalisation of taxation, we should think of giving the self –employed and maybe even small company owners one set of returns on the basis of which they can pay tax. Perhaps this could develop into a different tax for them which would not be called VAT or income tax and then it would be much easier to sell the package as it is all completely new, she added.
Mark Groom, vice-chair of CIOT’s Employment Taxes Sub-committee and a partner at Deloitte, suggested that the Government set clear objectives and a road map on the treatment of employees, self-employed and workers. Groom focused on the boundaries in his lecture between self-employed and employed in terms of rights and taxation. The status test has evolved and keeps changing (e.g. in relation to mutuality of obligation and substitution) because, in part, courts prefer a flexible approach to determining status. But Groom considered certainty to be more important from a tax stand point. He presented a number of suggestions in response to tackling different perceived issues/objectives, including a possible new “withholding status” or “PAYE status”.
He showed the audience a graph that looked at the boundaries between employed and self-employed in terms of total tax and NICs on different levels of gross income (covering 2016-2017) which showed the substantial gap of £10,000 at £170,000 on class one NICs, a gap which also incentivises people to incorporate. Groom then showed the same graph rolled forward to 2020-21, which showed the incentive to incorporation is even greater because the corporation tax rate is coming down.
Paul Morton, the new tax director at Office of Tax Simplification, was keen to show how much research the OTS has done on the taxation of self-employed and the gig economy. These include the Employment Status Project.
He suggested ‘indirect solutions’ such as the alignment of income tax and national insurance and to widen the deduction of tax at source. He said we need to look at entitlement to benefits to get a ‘rounded conclusion’.
During a Q&A session, the audience had a lot to say about winners and losers when it comes to employment taxes. The panel were keen to say that most employment taxes are not hypothecated, and cliff edges cannot be resolved until the Government is clear on what it wishes to achieve. Miller replied to an audience member that we need to see how much people are prepared to sacrifice in employment rights for tax reasons.
The event was chaired by CIOT President Bill Dodwell.
Paul Johnson, director of Institute for Fiscal Studies and Chairman Bill Dodwell, President, CIOT
Helen Miller, associate director, Institute for Fiscal Studies
Judith Freedman, professior of taxation law, Oxford University
Mark Groom, partner, Deloitte and vice-chair of CIOT Employment Taxes Sub-committee
Paul Morton, tax director, Office of Tax Simplification
Question and answer sesssion