Just days before the Chancellor delivers the UK’s most important budget in recent times, the Treasury Committee has issued a report “Tax After Coronavirus” in which they consider how the tax system could support long-term economic stability. Much of the report focuses on the Committee’s belief that “a major reform of the tax treatment of the self-employed and employees is long overdue” and they call for a review of the differences. However the report fails to take into account that there has been many such reviews over the years, and indeed the government has failed to publish their response to the last such consultation undertaken by BEIS, Treasury and HMRC in February 2018! This particular consultation included a section dedicated to tax issues relating to employment status, and the fact that some 3 years later the government has still to publish their response to stakeholders input could be indicative that the issues are too complex for a simple solution.
The “three person problem”
Furthermore, the Treasury Committee report discusses a newly labelled “three person problem” which is a crude attempt to imply that the 3 different types of taxation for work completed by employees, self-employed people and businesses is somehow wrong. The report recommends that this “problem” should be eliminated altogether, which is a vast over-simplification suggesting that individual tax rates need to be amended, whereas in fact the real issue is employers NICs which the businesses pay in relation to employees but not self-employed people nor business to business arrangements. Until there is action to address this fundamental point, then there is always going to be a disparity in the revenue paid to the government in relation to different types of work undertaken. It is important to understand that the differential is not due to the tax or NICs paid by individuals, but the NICs paid by businesses engaging them.
Self-Employment vs Employment
In addition, the report proposes that “if the tax advantages of self-employment were to be reduced, then the tax advantages of running a limited company should be considered for reduction relative to the taxation of employees under PAYE.” Again, another over-simplification. In fact there are minimal tax advantages of self-employment because sole-traders’ annual tax and NICs bill is not much less than that of employees.
The report implies that people choose self-employment, whether as a sole-trader or limited company, due to tax advantages. However independent research commissioned by BIS (as it was called then) in 2016 established that tax was the main motivation for only 1% of self-employed people. Conversely, most respondents cited flexibility as their main motivation for self-employment, then independence, then work satisfaction. It seems very unlikely that motivations have changed much since 2016, except that self-employment is considerably less attractive now given the pandemic-related uncertainty.
Aside from the aforementioned inaccuracies in relation to tax and employment status, the report recognises the need to support business. It proposes there should be a temporary three year loss carry-back for trading losses for businesses, which will help businesses that were previously profitable recover from pandemic-related losses. The report also suggests that a moderate increase in corporation tax could raise revenue without damaging growth, however a very significant increase in the rate would be counterproductive.
In the longer term, the report suggests reviewing stamp duty land tax, council tax, and creating a long-term strategy to simplify tax. You can read the full report here.