A group representing self-employed taxpayers has called for a full merger of income tax and national insurance contributions and suggested the creation of a new “freelancer limited company” structure as an interim measure, while Menzies tax partner Simon Massey has called on the government to “get off the fence” and consult on an alignment of income tax and NICs.
The chancellor will deliver his Autumn Statement on 3 December. IPSE, the association for Independent Professionals and the Self Employed, said an expert body should examine how a merger of income tax with NICs can be delivered. A merger would bring about a major simplification and make the abolition of IR35 possible, it argued.
In the meantime, a “freelancer limited company” structure would deliver “clarity of employment status” for independent professionals. “It would be a specific, opt-in structure, open only to independent professionals, not large companies, which would exempt them from IR35 and treat them as a business.”
The group said in its recent manifesto that IR35 was “impossible to administer, impossible to fully understand and a prime example of overly complex tax legislation that helps no one”.
Just over half of the respondents to AccountingWEB’s recent IR35 survey favoured abolition of IR35 when asked to say what would be the single most effective solution for resolving IR35 issues, while just 16% favoured a merger of income tax and NICs.
But last week Jason Piper, tax technical manager at ACCA and a member of HMRC’s IR35 Forum, warned that it was “hard to think of a scenario worse than [the] chancellor abolishing IR35 from April only for it to be reintroduced in a new and (even more) unfamiliar form by an incoming successor as an emergency measure two months later”.
Writing on the Contractor UK website, Piper said critics of the IR35 regime would “inevitably be disappointed” that the forum’s current review will not call for abolition. “But that is simply something that the forum is not placed to do,” he said.
Obstacles ‘hardly insurmountable’
Simon Massey said the most obvious obstacle to a full merger of tax and NICs was “the impact on people not in employment, such as shareholders and pensioners, as they do not currently pay any NIC”. But this was hardly insurmountable, he suggested.
“Dividend income is already taxed at a separate rate from employment income. And most people’s pension funds are so small that some slight tweaking to either the tax threshold or the state pension would easily iron out any anomalies.”
Massey said the “real reason” for the delay appeared to be political. “No government wants to draw attention to the true marginal rate of tax that UK employees pay. For example, an employee on the UK average wage of £25,000 loses about a fifth of their income in tax and NIC.”
Integrating the operation of tax and NICs
The government consulted in 2011 on integration of the operation of income tax and NICs. In a foreword to the “call for evidence” David Gauke said the government would not extend NICs to dividends or savings, and would maintain the contributory system underpinning NICs.
Budget 2011 had suggested that integration could “remove distortions, reduce burdens on business and improve fairness”, but any change would be complex.
Responses to the call for evidence “confirmed the appetite for reform” from employers, tax and payroll professionals, Gauke said. The government established technical working groups to discuss options for reform, which met in December 2011 and March 2012.
But the Treasury noted in December 2012 that “the detailed and extensive work the government has done so far shows that this is a large and complex reform”. Employers were already adjusting to a large number of tax reforms, it added.
Autumn Statement 2012 announced “that the government will wait for further progress on planned operational changes to the tax system before formally consulting on integrating the operation of income tax and NICs”.
Last week IPSE welcomed the government’s appointment of David Morris MP as “the UK’s first ever self-employed ambassador, who will bang the drum for freelancers throughout the UK”.
David Cameron tweeted: “Our new ambassador for the self-employed, @MPDavidMorris, will ensure we're always supporting Britain's growing army of freelancers.”