Fairness and tax

The Government likes the idea that everyone should pay their 'fair share' of tax. It is a shame that this doesn't seem to include MPs, but even despite their hypocrisy, I disagree.

Apart from the fact that 'fair' is a highly subjective notion it is iniquitous that someone who has a vested interest in taking the money from us should decide what is fair! This is legalised mugging, with the mugger saying that you should be grateful because they are giving you their personal and undivided attention.
Tax is a legal construct - the ethics (or 'fairness') relate to what the tax is spent on.

It is impossible to discuss what constitutes a "fair" value of tax unless it is clear that there is a consensus about the role of the state. In a democracy it is assumed that there is a regular and vigourous appraisal about the size of the public sector and its entitlement to a share of the wealth produced by the nation.

Until this is established we can conclude that a "fair" value of tax is zero.

The tax system should be completely neutral. It is there to pay for public goods.

In the case of the self-employed and employed individuals, there should be no difference in either the benefits or the costs from a tax point of view. Employed people should be able to offset costs as self-employed do (essentially dropping the 'necessary' condition in the expenses system) - recognising that employers are no longer paternal.

Self-employed people should always be self-employed if they swear an oath in front of a solicitor, but shouldn't get any tax advantage or disadvantage due to that 'career choice'.

For me the benefit to society of a business is when it starts providing employment for people who are not able or willing to make a job for themselves. And for that they should be rewarded with an 'allowance' - rather than being penalised with Employers National Insurance.

Tax is fair when it is simple, balanced and understandable. Getting rid of the complexity and the bungs to vested interests with better corporate lunches would go a long way to reinvigorating the economy.

NeilW

'fair' is a lousy word that has been debased by the doublespeak of the current government.

The debate about what 'public goods' should be purchased by the state is a politicial one. Taxation fairness is about how that amount is split amongst the population regardless of whether it is 'big' governement or 'small' government that is in charge at any particular point in time. Whatever system you adopt has to be able to accommodate the centralists as well as the anarchists.

In a democracy, is there not an assumption that the elected government has a mandate to specify levels of taxation? You can argue about our electoral system, the absence of inspirational politicians, the rights of minorities and so on but it can't be right to ignore this fundamental fact because you don't like the amount of tax you're asked to pay. If you don't like it, come up with an alternative, campaign for that alternative and make it so compelling that the majority vote for it. Surely that's what democracy is all about. The alternative is anarchy.

On the issue of fairness, surely similar incomes should generate similar tax bills and similar benefits.

"Fair" tax is an nice ideal but it cannot be defined in terms of "same income = same tax burden". This would only work if the whole remuneration package was taken into account. A contract worker on £300 a day is not on the same income as a permanent worker on £72,000 pa (£00 * 240 days) but is closer to one on £37,500. The permanent worker has paid benefits the contract one doesn't have and the employer has to carry the permanent worker's overheads while the contractor has to fund his own.

Most of us militants who rail against IR35 are not complaining about the need to pay taxes, but at the total lack of clarity over what taxes we should be paying and the uncertainties that imposes on our day-to-day work. We would not seriously object tp paying any level of tax, provided we knew in advance how much it was going to be and that all similar businesses were paying the same amount.

"Fairness" is NL-speak for social engineering. It has nothing to do with taxation!

In assessing fairness, I suggest one criterion has to be what benefits an individual is reasonably likely to get in relation to tax paid. For example, the employee on £20k may pay 10% of salary into a final salary pension scheme (especially if they work in the public sector) while a husband and wife incorporated company, turning over £20k would have to pay far more than £2k per year to get the same pension in retirement. The reason for this is that the employer or the state makes up the difference - a benefit that is NOT taxed, as I understand it. Perhaps the H&W company would be delighted to pay the same tax as a public sector employee if they got the same benefits - gold plated pensions, sick pay, sickies, the lower risk of losing your income...

Perhaps many reading this will say two things. (1) That tax rates have nothing to do with benefits, which vary widely from case to case. I say this counter is mistaken if the underlying philosophy is to make the tax system FAIR, rather than say maximize tax revenue, or give incentives to private sector or whatever. Even someone as rich as Croesus will agree with the platitude "Everyone should pay their fair share of tax" - the devil is in establishing the criteria for fairness. It certainly is not everyone should pay the same rate of tax, for example, for this would result in just one tax band, which most will argue is unfair. If this is accepted then differential tax rates - as above - are not instrinically bad - you need to establish whether they are working towards a goal, such as encouraging initiative or redistribution, for example, before you can say it is "good" or "bad".

The other counter (2) will be that the self-employed also do not enjoy the same benefits as some employees but do not get the same benefits as, say, H&W company. This is true; but this counter then accepts the principle that benefits must be taken into account in assessing tax fairness. Also one response would be to LOWER the taxes on self-employed. Hardly likely in these fiscal times. The other could be to increase the tax contribution from employee benefits. Tough choices, then, if you agree with the underlying philosophy of "Everyone should pay their fare share of tax".

You pose a number of interesting questions in your article. I'd like to respond regarding IR35.

To the extent that 'employers' have avoided Class 1 employers' NI, IR35 is entirely fair when comparing the overall tax burden of the situation (in comparison to an employed situation).

What is entirely unfair about the legislation is that, because this fact is only clear to the trained and experienced individual (cheekily I class myself in this category) it proves to be entirely unfair on the contractor. Would be 'employers' do not pass on the full bulk of the saving to the contractor in improved rates. Yes thay get paid more, but compairtively the rate is not significantly high enough to account for the savings the large corporations make.

This leads to an inefficient utilisation of Ltd. company structures, ties accountants up in advice to 'employees' and exaserbates business and individual short term thinking. Yes, the workforce is flexible, but does that workforce fully understand the implications of accepting the higher rate of earnings. Based on the number of discussions I have with contractors there is only one answer - No!

Is there an easy solution to the problem. Absolutely not. One thing is for sure, if I could ban clients getting advice in the pub, I would!

"Fairness" is a concept very much like "beauty" - it's meaning is different according to each individual's interpretation. It also changes over generations. You will no more find a tax system which everyone in society considers "fair" than you will find a woman who everyone in society considers "beautiful".
If you manage to dream up a tax system which the majority deem to be "acceptable" then you're doing well.

Iwan Evans

We should beware of thinking that IR35 was ever intended to be fair. My view is that this was a revenue-gathering exercise that had been rejected by ministers several times previously, but which seemed to fit in with the pet hatred of a particular Paymaster General. Note that her history includes working for large consulting companies who would far rather send in low-paid graduates for more than contractor money and trouser the profits. Sorry if this sounds cynical, but I have seen in it in action. A well-known pharmaceutical firm I contracted to was flooded with graduates one day, coincidental with a transport strike. None of them knew why they had been told to go there, but you can bet they were all billed!

IR35 drove a lot of talent overseas, pushed a lot of talent out of contracting, and had the remainder living in fear on a rolling 6-year basis and buying insurance. Quite an achievement, and all for what? We may never know because that particular Paymaster General would never say but more recent indications are that it may well have been costing me, a taxpayer, money! Is that fair?

Although it is empirically demonstrable that no government that has a non-neligible lifetime is capable of anything other than screwing those that are not of its constituency in favour of those that are.

So "fair" doesn't even come into it. Not within one million miles.

REDsq: Frankly old chap we haven't a clue what you're saying. I've referred this to the plain English campaign for an opinion

Edmund Burke, who was a Tory but at the time when they still spoke sense, had it right: 'To tax and to please, no more than to love and be wise, is not given to men'.

Personally I've never spent a day without food in my stomach or a roof over my head, so probably I've been taxed fairly all these years. True enough, I can't afford a Ferrari, but the wife wouldn't let me out in it anyway.

The problem here is Employers NIC. Get rid of it and the problem is almost gone. In so far as employers NIC goes towards paying for pensions then it should be paid by those in work and could be transferred to employees by raising employees NIC .

In so far as employers NIC pays for other government expenditure then it should be transferred to everyone by increasing income tax.

If there were no difference between tax and NIC between self employed and employed it would be fairer. Perhaps the self employed should be given more benefits in return for higher NIC.

Companies who take on contractors should pay higher rates to the contractors to compensate for their lack of rights.

This is a fantastic point, until you try to sell it to anyone who hasn't worked either as an accountant, employed somebody or worked in a payroll department. It would be seen by most as a huge increase in tax, and the cynic in me thinks it might be abused by large organisations by nt passing on the savings to employees as well.

Figure out a way to do this AND sell it then I think you're on to something.

A few thoughts

1. Agency staff (employed) - work for one employer via an agency for more than say 3 months and you gain employment rights with the employer (even if you move agencies or some other circumventing situations apply e.g. stopping for a week and re-starting).

2. Tax Credits - dismantle the system and remove half the working population from the benefits system. Replace it with shorter term benefits for those in need.

3. Freelancers - scrap IR35, and replace with employer taking responsibility (i.e. on employer's payroll) where IR35 would currently apply - unless hired as employed agency staff - then 3 month rule applies. Freelance status applies when client/employer can demonstrate that the work is outside of the IR35 criteria.

4. Give tax relief to employees for travel to work by public (excluding flying) transport (then scrap subsidies to transport operators) - including tax free benefit of railway season tickets provided by employers (with no BIK for use when not at work, provided the main purpose of the season ticket is for travel to/from work)

5. Give tax relief for useful employment expenses e.g. training, PI, and wider work related subscriptions.

6. Reduce employers and employees NI

7. Scrap MP's pensions - replace with Stakeholder, stop early retirement in public sector schemes.

8. What is a fair amount of tax - who knows...some of the above may make it fairer.

For the younger end of society the notion of 'employment' being anything other than wage slavery is laughable. Firms stopped being paternal at least a generation ago.

It's time to realise that real employment protection comes from a flexible workforce, pensions that are controlled by the individual and a lightly regulated employment marketplace. We need to have a system where it is easy and painless to hire somebody and get rid of somebody so that liquidity is maintained in the jobs market.

In a world where employers are bought, sold, asset stripped and 'reorganised' at a breathtaking speed it is ridiculous expecting an employer to 'look after you' throughout your entire career. It is an outdated concept that simply cannot survive in the 21st century.

There is a dead simple politically effective way of getting rid of employers NI. What you do is you scrap Employers NI. You require that all employers increase their staff's wages by the equivalent amount and then you introduce compulsory personal pension contributions at a similar level.

The result is that employees see nothing other than a rise in pension contributions and people avoiding employers NI are then required to contribute to their retirement.

The only other thing that needs doing is to scrap employees NI and roll it into income tax, while extending social benefits to the self-employed.

Then we finally have a level playing field.

How about having a single rate of tax as they do in many countries and get rid of all the allowances save a personal allowance to help those at the bottom of the ladder.

Most tax attacks these days are politically motivated. It was obvious that by introducing IR35 that work was sent abroad, this meant our contracting market shrunk as did the income that the government received. The figures that I heard banded about was that the tax office estimated the potential at £245M but in reality it was more like £60-£70M. This excludes the costs of administering it. I hope someone has the correct figures.

I am not sure why the self-employed are treated more harshly by some correspondants. They are the backbone of our economy.

you might also need to think about the VAT impact on the sole trader, partnership and company earning more than the vat minimum. where there is clearly an additional tax load. Also, if an employing organisation is exempt or partially exempt with only a small amount offset-able, eg government organisations, this means that the VAT element is on top of the contractor cost, giving a cost currently 15% higher than an employee earning the same as the contractor. One has to bear in mind that the employer has to pay NI on the employee costs, but this still means that the contractor cost to the organisation is higher than the employee. so it could be said that in this case there is an additional tax load on the VATable contractor not covered in your model.

Just as the American revolution was galvanized by the slogan "No Taxation Without Representation" perhaps your campaign could be "Same Tax, Same Benefits" - it would, I think, sum up how many self-employed and contractors feel. This is not a simple issue but I wish the government would stop treating it as if it was and drop the political platitude of "Everyone should pay their fair share of tax". (Obviously this was never intended to imply that MPs had to pay CGT).

Just on the subject of IR35, it would be perceived as being more 'fair' if anything else accrued to the worker as a result of falling under IR35.

My suggestion in the past has been for the IR35 worker as a consequence of the status to be included in the Agency Regulations despite any 'opt-out' previously signed, i.e. the IR35 status forces the opt-in.
If the Govt wants to bring in protections for Agency workers then this should also come into effect with the status.

However this is outside the discussions of taxation ... sorry !