Tax experts back self-employed tax increases after coronavirus

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Self-assessment Tax Return

A number of the country’s key experts in taxation have backed harmonising the tax liability of the self-employed with that of employees at a hearing of the Commons’ Treasury Select Committee, raising the prospect of “post coronavirus” tax rises for self-employed workers and limited company contractors.

Currently, permanent employees and self-employed workers pay the same amount of income tax, but the National Insurance liability of employees is higher.  Limited company contractors who are not subject to IR35 can choose to split their remuneration between a salary and dividends, which attract a lower rate of income tax than salaries and are not subject to National Insurance at all.  Limited company profits are subject to corporation tax, however.

Traditionally, the disparity between the overall tax paid by permanent employees, self-employed workers and company directors has been attributed to the greater level of financial risk that freelancers face and the more limited access to statutory benefits that they receive: freelancers and small businesses are more beneficial to the economy, on the whole, but take less out of the system in benefits, and the preferential tax treatment incentivises people to move into self-employment.

However, the covid-19 pandemic threatens to change this precept.  Both employees and the self-employed have received substantial economic support from the government (although, notably, limited company directors haven’t), and even back in March, chancellor of the exchequer Rishi Sunak said: “It is now much harder to justify the inconsistent [National Insurance] contributions between people of different employment statuses.  If we all want to benefit equally from state support, we must all pay in equally in future,” following the unveiling of the Self-Employed Income Support Scheme (SEISS).

But have the self-employed really benefited equally during the coronavirus crisis?  The argument could be made that someone on furlough could stand to receive significantly more than a self-employed individual claiming under the SEISS: an employee furloughed between March and October receiving the maximum amount would receive £19,062.50; a self-employed individual claiming the maximum amount of both SEISS grants would get £14,070.00.  Also, self-employed individuals with trading profits of £50,000 or more receive nothing: employees earning over this amount do get paid under the furlough scheme, to the capped amount.

Other exemptions have left over one and a half million self-employed workers out of the SEISS scheme, according to official statistics, and limited company directors are another demographic who seem to have “fallen through the cracks”.

With government debt spiraling due to the reaction to the global health crisis, the Commons’ Treasury Committee has launched a new inquiry called “Tax after coronavirus”, with the objective of reexamining the tax system.

When asked at a recent oral evidence session if reduced taxation for the self-employed is justified, Charlotte Barbour, director of taxation at the Institute of Chartered Accountants of Scotland (ICAS), said:

“There is a hornets’ nest, thank you.  It is very difficult to justify different tax rates for what people call the three-person problem.  If you have similar work, whether you are employed, self-employed or through a company, there does not seem to be a logical reason in terms of fairness as to why those different people should pay different amounts of tax.  I do question that.”

She did go on, however, to decline to offer any particular recommendation on how to change the system, saying that the issue “needs a wider discussion and a contribution from everybody” and that “the self-employed do face more risk so maybe, arguably, they have to pay less”.

When asked about the issue of “limited company directors who can draw dividends that are not subject to national insurance”, John Cullinane, tax policy director at the Chartered Institute of Taxation (CIOT), agreed with Ms Barbour, but highlighted the political difficulty in altering self-employed taxation.

“If you had a blank sheet of paper, you would probably design something where either they were somehow paying the same tax or, even if there were different taxes for different legal situations, the overall balance was better.  The big problem with saying that — this is, I suppose, why you are putting us on the spot — is that the differences are so huge that to adjust them would be massively painful for self-employed people.

“People often talk about the few-percent differences on employees’ national insurance, or not having national insurance on dividends, as being what it is all about, but the elephant in the room is the employer’s national insurance of 13.8%, which is being taken out of the system by having somebody move off payroll, whether they are incorporated or not. The amount of money that self-employed people are able to charge in the market no doubt reflects the fact that they are less heavily taxed than if everything was run through an employed basis.

I do not pretend it is easy to get from A to B.  I would plead the Chair’s comment at the beginning about political unfeasibility.  The politics are much more difficult here, frankly, than with VAT on food or some other things we have been talking about, and for good reason. It would be a massive shock to people.”

Anita Monteith, tax manager at the Institute of Chartered Accountants in England and Wales (ICAEW), brought up The Taylor Review of Modern Working Practices, published in 2017, which recommended making “the taxation of labour more consistent across employment forms while at the same time improving the rights and entitlements of self-employed people”.  She said:

“Can I remind everybody that we had some really good work done by Matthew Taylor a few years ago?  He was spiked before he even got started because he was told specifically not to look at tax.  I think all of us here went in to see him, one after the other, and said, ‘But you must look at tax; otherwise you are missing the elephant in the room.’  We need to have a proper conversation.”

Rishi Sunak is almost certainly going to have to raise taxes over the next twenty-four months given the unprecedented amount of public funds that have been needed to combat coronavirus, and the economic fallout of the crisis.  He is not bound by the recommendations of the Treasury Committee, but will certainly be following this inquiry.  Whether or not the tax treatment of the self-employed or owner-directors will be targeted remains to be seen, but the conversation about alignment with employees continues, in earnest.

23rd September 2020.