Treasury Committee report threatens tax raid on UK self-employed workers
The government has come under scrutiny after an investigation looking for ways to mitigate the financial damage caused by the Covid pandemic appears to propose a tax cut on the self-employed.
The latest report of the House of Commons Treasury Committee inquiry entitled Tax after coronavirus calls for a review of tax reform for the self-employed, calling the current system “confusing, unfair and unsustainable”.
The possibility of possible tax hikes will seem threatening to entrepreneurs, many of whom are already bracing for the fallout from non-payment rules. However, as Dave Chaplin, CEO of ContractorCalculator observes, substantial action is far from certain:
“This is yet another report that calls for a review of the review of how self-employed workers are taxed. We have had so many in the last decade that we are now starting to lose count. As is often the case, this call for review may just be a way to kick the problem out into the tall grass. ”
The non-payroll impact overlooked in the Treasury report
Though chaired by MP Mel Stride, the man who oversaw the progress of payroll rules and the controversial parliamentary charge of borrowing while serving as Financial Secretary to the Treasury, the report of the Treasury Committee did not recognize either of the legislation or their effect on the self-employed.
The omissions are all the more contentious given that non-salary charges and borrowing costs feature prominently in the written evidence collected from stakeholders to inform the investigation.
“It is disappointing but not surprising, unfortunately, that this government is proposing tax hikes on the self-employed even before the full impact of the Off-Payroll rules is realized, and that the Off-Payroll has not been realized. apparently not even relevant, “he added. Chaplin notes.
“It is also interesting to observe that the report expresses a reluctance to mitigate the economic damage of Covid by introducing a one-off tax on companies and sectors that have benefited financially from the pandemic due to its ‘potentially retrospective nature’. If this is a reason for policy rejection, then I wonder when we can expect the borrowing fee to be withdrawn. ”
Report fuels ‘blind’ view of self-employment
The omission of off-pay and loan-fee rules from the conversation is symptomatic of a government refusing to look at issues holistically, further evidence the Treasury report provides. Much discussion has focused on perceived inconsistencies between tax contributions in different forms of paid and self-employment, although the report fails to maintain a balanced debate.
Two factors often cited to justify the modest tax advantages enjoyed by entrepreneurs are the lack of job security they experience and the fact that they do not enjoy the same rights as employees. However, these details received little attention in the report, and the evidence that dealt with them was generally dismissive.
Professor Judith Freedman, Professor of Tax Law and Policy at Oxford University Law School, gave an example of the additional risks faced by self-employed workers, saying:
“The tax system is a very poor vehicle to reflect this risk, because some self-employed people take risks, but others take very little or none at all. Therefore, if you use the risk argument, it doesn’t work well. Some employees, for example, have very risky and precarious jobs. The risk is not related to the amount of tax paid under the current system. ‘
For Chaplin, looking at issues in isolation contributes to a narrow view of the tax system: “This report examines an extremely narrow range of issues when considering tax disparity. While the Treasury seems to have picked many quotes that suit its agenda, factors such as the unique way in which casual workers benefit the economy have been left out of the discussion altogether. How to achieve a fair result on the basis of this approach? ”
The Treasury continues to neglect “the elephant in the room”
The report also includes a chart from the Institute for Fiscal Studies (IFS) comparing the tax owed on three jobs generating £ 40,000 – one performed by an employee, another by a self-employed person and the third by a limited liability company. . service provider.
The graph shows that the total tax levied on the employee falls just below £ 12,000. Meanwhile, the tax claimed from the independent sole trader is just over £ 8,000, while the limited company pays just under £ 8,000 in tax.
Although apparently intended to support proposals to increase self-employment taxes, the graph used is misleading for a number of reasons. Most notable of these are the employer’s National Insurance Contributions (NICs), described elsewhere in the report in evidence provided by John Cullinane, Director of Tax Policy at the Chartered Institute of Taxation (CIOT), as “The elephant in the room”.
When the employer’s network cards are removed from the equation, the graph shows that the tax generated by the three engagements hovers around £ 8,000, with independent traders paying the most.
Even considering only the taxes paid by the individuals themselves, problems remain, as Chaplin points out: “This graph effectively compares apples and oranges because it fails to recognize the fact that limited liability company contractors charge generally much more than their employee counterparts, which means they contribute more to the tax.
“Even without recognizing ‘the freelance premium’ when comparing effective tax rates for contractors and employees earning over £ 50,000, it is the contractors who contribute the most, which ContractorCalculator has already shown, adds Chaplin. “The 2016 dividend tax hikes have all but wiped out the modest tax breaks enjoyed by entrepreneurs in limited companies. ”
The Treasury calls for a “major reform” of the taxation of the self-employed
Despite the facts, the report’s narrative continues to focus on the so-called “tax breaks” enjoyed by the self-employed, concluding: “We believe that if the tax benefits of self-employment were to be reduced, the tax benefits of running a limited company should be taken into account for a reduction compared to taxing employees under the PAYE.”
Ultimately, the report recommends a “major reform of the tax treatment of the self-employed and employees”, adding: “The current system is confused, unfair and unsustainable. The review should incorporate the benefits resulting from the payment of NICs and other taxes as well as the level, incentives and interaction of these taxes. He should seek to eliminate the so-called “three-person problem” as much as possible.
Elsewhere, in describing its proposed priorities for tax reform, the committee assumes: “The evidence from this survey clearly shows that the differences between income tax and national insurance contributions create distortions and injustices… The government should consider what can be done to gradually eliminate the distortions over time . “
For Chaplin, this is a curious claim: “The report itself shows no evidence of ‘distortions and injustice’. It sounds more like an assertion; in which case, we urge MPs to read the question rather than blindly voting on any potential policy that may result from it. ”
Reassuringly for self-employed workers in the UK, the promise of further policy is by no means certain, with the government likely aware of a potential backlash, as Chaplin points out:
“It’s a difficult problem, and any solution will create considerable distortion with winners and losers. Due to the short duration of five-year legislatures, no government ever wants to be brave enough to make the necessary changes because it is a sure-fire loser in elections. In my opinion, tax certainty for businesses must be at the heart of any change or else they will not move to the UK.