Equal tax treatment for different forms of employment
02 August 2017
The Taylor report ‘Good Work’ concluded that treating different forms of employment more equally in the tax system would be fairer, more economically efficient and support better quality work.
The world of work is experiencing the biggest structural change since the current system of taxation was introduced. The Taylor report says this means that now is the right time to properly consider whether the way in which employment is taxed achieves what it is designed to.
Some argue that the rate or level of National Insurance contributions that someone pays should be related not just to the benefits they receive from the government but also to the rights provided by their employer.
The rights that an employee gets are paid for by their employer; they form part of their overall remuneration. A self-employed person can set their own prices and keep all of their profits; from this they can choose how much to take home and how much to put into a pension or set aside for holiday pay. However, part of an employee’s salary usually has to be received in the form of a pension and holiday pay.
An employed person’s total remuneration is therefore rarely their headline salary: an employer paying someone a headline salary of £25,000 could actually pay that person at least £30,000 once other parts of their salary – such as mandatory holiday pay and pension contributions – are taken into account. This is partly to reflect the mutual relationship between an employee and employer: an employee has certain rights and benefits but also obligations to turn up to work and to carry out tasks as directed by their employer.
A genuine self-employed person is their own employer; they work on their own terms and provide themselves with their own pension and holiday pay. The costs associated with providing these benefits will usually be recovered through the amount that they charge. This means that for a business engaging labour, the cost of labour (whether employed or self-employed) should be neutral: they will have to meet an employed person’s costs (including wages, holiday pay and pension contributions) directly and a self-employed person’s costs by paying a higher fee for their services.
The review considered elsewhere how employment rights affect business decisions. It is why the review team believe there is a need for much greater clarity on the boundary between employment and self-employment.
As well as affecting the decisions that individual people and businesses take, the different rates of tax on different forms of work also have an impact on how much money the government raises in tax revenue. HMRC estimates that the government loses out on £5.1bn a year from the lower rates of NICs paid by the self-employed. As the nature of work changes, this is a growing cost to the Exchequer; the OBR estimated that the increasing number of people working through their own company will cost the Exchequer an additional £3.5bn a year by 2021-22.
With relative parity between employed and self-employed entitlements, and the fact that if things go disastrously wrong, the state remains the safety net on which self-employed people can rely, is it right that employed people have a disproportionate responsibility for contributing?
The review believes that the principles underlying the proposed NI reforms in the 2017 spring budget are correct. The level of NI contribution paid by employees and self- employed people should be moved closer to parity while the government should also address those remaining areas of entitlement – parental leave in particular – where self-employed people lose out.
It is also important to recognise that the difference in NI contributions paid by the self-employed and employed individual is relatively small in comparison with the fact that employers pay 13.8% NI contributions on the labour of employees and workers (earning above the NI secondary threshold), whilst the engagers of self-employed labour do not make any NI contributions on behalf of those they hire. The review believes that, over time, there is a case for moving to a more equal tax treatment of self-employment: it follows that there is a case for companies and others who engage self-employed labour to contribute more to the overall NI payments made by the self-employed, in the same way as they do for employees.
The review concludes that there are various ways in which the system could start to move to a more consistent level of taxation on different forms of labour and, as a consequence, help remove some of the perverse incentives in the system and address issues of fiscal sustainability. None of these measures would be easy or uncontroversial but, given that this review is only the latest in a series of studies to make the point about the differential taxing of employed and self-employed, the review would encourage the government to raise public awareness of this issue and engage in debate with stakeholders about potential long term solutions.
It is clear to review members that the current system is driving behaviours that are not always consistent with the delivery of fair and decent work. Whether this be the business developing a workforce model based on reducing costs rather than delivering quality, an individual choosing self-employment simply for the lower tax wedge or consumers driving costs lower still through their purchasing choices, it is time for change. Over the coming years, the government should seek to examine ways in which the tax system might address the disparity between the level of tax applied to employed and self-employed labour.
It is clear that with the numerous recommendations coming from all areas of the ‘Good Work’ report, we will be involved in many consultations over the coming months and years; with what we hope will be ‘gradual change for the better’ to the tax system. The CIPP Policy team will keep the payroll profession updated and involved, in every step, along the way.