17 January 2022
Justine Riccomini, head of taxation MSc FFTAAIPA Chartered MCIPD ChFCIP at the Institute of Chartered Accountants for Scotland (ICAS) explores the impacts of growing complexity in the UK income tax system
Key points:
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increased complexity in the income tax system is producing unintended consequences and difficulties
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there are now several different statuses, not just employed and self-employed
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the UK government should revert to the Good Work Plan to address alignment issues and falling National insurance contribution (NIC) revenues.
Align and simplify The need for the UK government to introduce emergency assistance schemes to help the employed and self-employed shone a spotlight on the many distortions within the income tax system. It also showed how people can declare their incomes in different ways to suit their own circumstances and personal behavioural responses to taxation. In the ICAS paper, The Future of Taxation in the UK, the following recommendations were made:
better alignment of taxation and employment law
the government should continue to implement commitments made in the 2018 Good Work Plan
the treatment of employed and self-employed workers should be more closely aligned by introducing changes to self-employed NIC rates and to expenses rules
additional resources should be made available for tackling modern slavery and the exploitation of gig economy workers.
See ICAS report here: http://ow.ly/XCBj30s7GSK
Sticking plasters Attempts to tackle problems in this area – recent examples include changes to the taxation of dividends, some restriction of reliefs on incorporation, IR35 and the off-payroll working rules – have increased complexity and produced some unintended consequences. The fundamental issues of taxpayer behaviour, employment ethics and falling NIC revenues need to be addressed.
And urgently.
Where to begin? The government’s 2018 Good Work Plan stated that it would bring forward detailed proposals on how employment status frameworks for employment rights and tax could be aligned and committed the government to improving the clarity of the employment status tests. Clear boundaries should exist between those who are genuinely self-employed entrepreneurs, and those who are not, and so are, to all intents and purposes, employees.
Measures to improve alignment between the taxation of employed and self-employed workers should be conceived simultaneously.
Despite the retention of class 2 NICs, self-employed workers continue to pay significantly lower rates of NICs than employees and enjoy more generous reliefs for expenses. Addressing these distortions in the short-term could be achieved without significantly increasing complexity.
Secondary NICs, employer behaviour and the impact on gig workers and modern slavery
The cost of employer NICs is key to avoidance behaviours, exploitative practices in the gig economy and to illegal modern slavery. ICAS considers the benefits to be reaped from carrying out its recommendations will consist of:
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providing greater clarity on employment status for employers and workers
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reducing the role of tax in pushing individuals towards self-employment for the wrong reasons
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improving alignment of the taxation of the self-employed and employees, making clear the link between paying tax and NICs into the system and receiving state support
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significantly reducing exploitation of vulnerable workers.
Featured in the February 2022 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.