Income tax/NI merger: debate starts here
For tax advisers, there were two main areas of suspense on 23 March. What was the Chancellor going to do about IR35 and would he really act on the Office of Tax Simplification proposal to merge income tax and National Insurance Contributions?
Yes, he really did! It what could be a landmark moment in the 2011 Budget speech, Chancellor George Osborne confirmed that he would consult on the “options, stages and timing of reforms to integrate the operation of income tax and NICs”.
Throughout AccountingWEB’s entire history since 1997 members have repeatedly called for an end to the unnecessary complexity and administrative burdens that the parallel employment tax regimes cause for businesses and their advisers.
Two weeks before Budget Day, “frustratedwithhmrc” put srapping NICs top of his wishlist. PKF head of employment tax and rewards Philip Fisher echoed the message in one of his pre-Budget missives, characterising NICs as a stealth tax that long ago ceased to have any real connection to the benefits they paid for. “Combining income tax and NIC may be very courageous but would be a fine way for Mr Osborne to be remembered by posterity,” he said.
One of the tax profession’s most deeply held hopes became more than just a pipedream a fortnight ago when the Office of Tax Simplification small business review recommended that work start on a long-term project to merge the taxes.
But as OTS chief John Whiting has acknowledged, the mismatch between income tax and National Insurance rules is not only a major cause of complexity for business, it also presents a significant barrier to reform.
Complicating the picture is the planned move to Real Time Information (RTI) for PAYE records. Instead of filling in year-end forms, employers will submit the data electronically every pay period, starting for big companies in April 2012. According to the CIPP's Karen Thomson, “It is a shame that the proposed merger could not be done before the move to RTI.”
AccountingWEB contributor Simon Sweetman is a veteran of numerous tax panels, including the OTS small business review, and his ears are highly attuned to the linguistic nuances employed by Treasury ministers and civil servants.
Shortly after the Chancellor sat down and the transcript of his Budget speech was released, Sweetman pointed out, “The reference is to integrating the operation of tax and NIC. I believe that rules out merger.”
Where does this leave IR35?
If one took the cynical view that Budget statements are largely PR exercises designed to manage the news agenda, the OTS reviews confirmed that income tax/NI merger was the headline-grabber. After more than a decade in operation, IR35 has come (mistakenly) to be seen as a special interest for IT contractors and fallen off the media radar. The rules will be reviewed rather than retired, the Treasury announced on Wednesday.
After reading the Budget documentation, Simon Sweetman lost patience with the politicians too. “So after all these years of Tory MPs fulminating about the iniquity of IR35, what do they do when they come to power? Nothing,” he huffed.
Yet Osborne has created an opportunity to try and make the system better. Perhaps AccountingWEB members should follow up the OTS Small Business Review’s findings and put forward detailed suggestions and arguments for reform.