Thumping majority: A tax vision
What if the ruling party achieved such a huge majority in Parliament that it could do whatever it wished with the tax system. What could it do?
This article was inspired by one of Giles Mooney’s excellent lectures on Finance Act 2017, in which he wandered slightly off-topic to talk about how a future government could radically change the tax system, if it had the power to do so. Mooney suggested that a majority of 150 or more seats in the House of Commons would create this situation.
The last time one party had such an opportunity was in 1997 when Labour won 419 seats, and had a majority of 179. In Gordon Brown’s first Budget he abolished refundable dividend tax credits, cutting the income of pension funds at a stroke. Many other radical changes were to follow.
I’m not endorsing these ideas below as good or bad, I am merely highlighting where changes could be made, if the political will and power were there.
We know that Philip Hammond wanted to move towards equalising the NIC rates for employed and self-employed individuals, as that is exactly what he proposed in his March Budget. The modest increase in class 4 NIC to 11% could be reintroduced with a target of 12%.
A strong government could grasp the nettle of income tax and NIC and merge those two taxes. Some would celebrate this simplification, but would pensioners be happy at paying 32% tax on their pensions, and shareholders meekly pay 19.5% to 50% on their dividends?
The two new £1,000 allowances for sundry income and property income were taken out of the Finance Bill 2017 before it was passed, but they will almost certainly be reinstated and be backdated to 6 April 2017. This is because those allowances are designed to help HMRC, not the taxpayer. They remove from the list of “tax evaders” those people who generate small amounts of income from their hobby, or occasionally letting out their driveway.
As £1,000 seems such a nice round number, perhaps the Chancellor will also reduce the dividend allowance to £1,000. In the March Budget it was announced that the dividend allowance would be reduced from £5,000 to £2,000 from 6 April 2018. This provision was not included in FA 2017, but it will almost certainly be reintroduced, perhaps with a target of £1,000.
Just five years ago (2012/13) we had a top rate of income tax of 50%, could that return? If NIC and income tax are merged, a 50% top rate would seem to be a natural limit.
A consultation paper released alongside the 2016 Autumn Statement said tax relief on pension contributions cost £48bn in 2014/15, and two thirds of that tax relief was enjoyed by higher and additional rate taxpayers. In comparison £13bn of income tax is paid each year on pensions income. The tax relief on funds paid into a pension scheme is clearly not being recouped by tax on benefits paid out.
Rumours that higher rate tax relief could be removed from pension contributions have been circulating for years, and would be high on any Chancellor’s list.
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The burden of pensions auto enrolment for employers is considerable, not only in terms of the administration, but also the contributions the employer must make. Universal access to a workplace pension was a policy created by the coalition government in 2010-2015, perhaps this policy would be unwound for certain employees or employers.
I believe that one set of MTD rules won’t work for all sizes of company, so it seems logical that a distinction will be made between the reporting requirements for very large companies and those for smaller companies. HMRC has already announced that such a distinction will be applied for partnerships with turnover of £10m or more, who will not be required to join MTD until 2020. Just three years ago we had two different rates of corporation tax for large (21%) and small companies (20%), and all the glorious associated company rules to prevent groups of companies from exploiting the lower rate paid by smaller companies. If small companies were required to pay a higher rate of corporation tax, of say 26%, and larger companies paid an internationally competitive rate of say 15%, there would be no need for those associated companies rules.
Such dual rates of CT would also make sense for the government, as the smaller companies can’t easily move to another country to take advantage of a lower tax rate, but larger companies can.
It is expensive to employ people; on top of their basic wage the individual must be paid holiday pay, sick pay and benefits such as pensions. Employment law can also make it difficult to sack employees at will, or use their labour for variable periods – although zero-hours contracts solve some of those issues.
The market created a solution about 20 years ago – the personal service company (PSC), which has been used by contractors ever since. The introduction of IR35 from April 2000 was an attempt to reduce the tax advantages of using a PSC, but it has clearly failed.
The new tax rules for off-payroll working in the public sector are another attempt to crack this nut, but all they achieve is a confusing mess of employment taxes applied to company receipts. How the PSC is supposed to account for the income tax and NIC deducted from its invoices is still anyone’s guess.
What would happen if employers were allowed to differentiate between long-term workers for rights and benefit purposes? One class of workers would have employment rights including; redundancy pay, pensions and holiday pay. The other class of workers (let’s call them “contractors”), would have no employment rights, but would be taxed in the same fashion as the workers. The IR35 rules could be eliminated at a stroke, and no tax would be lost.
Welcome to the Brave New World.