How do we address the inconsistencies between modern employment practices and the tax system?

At the latest event from the Responsible Tax Lab we welcomed Matthew Taylor, Chief Executive of the RSA, to talk about the independent review he led on modern employment practices.

A timely event, held just two days after the publication of the Taylor Review’s final report, Good work: the Taylor review of modern working practices, we welcomed a number of tax experts and trade body representatives [1], to reflect on whether there are fundamental inconsistencies between the tax system and employment law and practice, and the opportunities for future reform.

Although the Taylor Review didn’t set out to cover tax in its remit, it was nevertheless hotly anticipated by the tax community – this discussion highlighted why. It is impossible to have an authentic conversation about the changes in the labour market without talking about tax.  The Taylor review offers some important insights into modern ways of working and opportunities for the tax system to adapt.

Unsurprisingly, participants were keen to discuss on one of the top tax controversies to hit the headlines earlier this year: the significant gap between the tax paid between self-employed and employed workers. Although the Chancellor’s proposals to increase the national insurance contributions (NICs) of the self employed in the Spring Budget provoked widespread public controversy and forced a government U-turn on the issue, the proposals at the time (and since) were met largely with approval from tax professionals. A number of organisations have advocated for reform – this is no new issue, but a product of gradual historical change. When the national insurance system was set up, the amount of tax paid per hour on self employed labour in total was two thirds of the amount paid by employed labour. That figure is now a third.

The arguments in favour of lower taxes for the self employed often point to the risks which people take personally and the fact that they don’t access the same welfare benefits as employed people. Then there is also the fact that self employed people are not providing for themselves – levels of pensions and savings for self employed people are very low – leading to what the Resolution Foundation has called the gap between the “privileged” and the “precariat”. Some argue that the tax system must compensate for this, whilst others warn that it is dangerous for the state to act in lieu of the employer responsibility.

Participants largely agreed that when the previous Chancellor George Osborne introduced the state pension for self employed people, this would have been an opportune time to raise NIC contributions too. Perhaps there are opportunities for future reform to link an increase in taxes revenues from self employed people to an increase in their welfare provisions, levelling the playing field both ways.

The Taylor Review also looked at the potential of cashless transactions to enable new approaches to tax collection – as we develop platforms which self employed people use to find work, these platforms could also be used to encourage savings behaviours, or evolve to act as PAYE scheme providers. Eventually perhaps, government incentives or matches could take place through these platforms too.

We also discussed the differences between the tax paid by self employed workers and company owners and the distortion (or “gaming”) that ensues. But while there are instances of people using company vehicles to avoid tax, there is also often legitimate rationale for individuals to incorporate as a company – such as the legal protection provided by incorporated status, or the fact that some individuals prefer themselves in a corporate form for reputational reasons. The needs of these people shouldn’t be ignored and the debate shouldn’t be reduced to a situation where some people are viewed as tax avoiders when there are other, non-tax issues at hand.

These are clearly complex issues, made no simpler by the fact that the constituency of self employed people is not a homogenous group – in fact they represent multiple “tribes” with multiple interests. Often clear cut lines don’t exist as there are a range of individuals who pursue a mix of self employed and employed activities, perhaps supplemented by a few gigs for good measure. With 15% of the UK’s labour market categorised as self-employed and as the gig economy continues to gain popularity, the taxation practices surrounding this group will inevitably be a focal point for government policy.

A number of policy and structural reforms have been mooted by various organisations to these issues. For example, the application of a simple payroll tax to the category of workers which the Taylor Review refers to as “dependent contractors”, or a system which levies business services taxes rather than taxes on labour, or tax which falls on the consumers of self employed labour. The OTS last year proposed the idea of a new trading entity called a SEPA (Sole Enterprise with Protected Assets) model, which would offer liability protection for sole traders while retaining administrative simplicity. This echoes some of the ideas put forward by IPSE in their “Freelancer Limited Company” suggestion. Then there is the “look through” approach to taxation, whereby the tax authority would effectively look through the company vehicle and considers the shareholders as individuals (this is how some company models in the United States are treated).

It is clear that there is no lack of ideas for reforms to specific taxes, company structures and the workings of tax administrations. What are the barriers to moving some of these forward? Many of our experts pointed to the lack of joined up political and public support. Here there is a fundamental issue which echoes some of Common Vision’s other work on tax policy in public debate. We need much clearer public discussion on why the tax system works as it does and how we should want it to work.

There is expected to be an official Government response to the Taylor Review by the end of the year. Participants were keen to collaborate to move the tax recommendations forward. This would require engaging and “socialising” ideas with small businesses and self employed people, so changes are not viewed as “an attack on the white van man”. Incremental change in this regard is key. And tax professionals and the policy community have a key role to keep this debate going.

 

[1] With thanks to the ICAEW for supporting this discussion, and to participants: Colin Ben-Nathan, Chair of the Employment Taxes sub-Committee, CIOT; Iain Campbell, Vice-President, Association of Revenue and Customs; Ann Casey, Partner, Taylor Wessing; Andy Chamberlain, Deputy Director of Policy and External Affairs, IPSE; Bill Dodwell, Partner, Deloitte; Graham Farquhar, Employer Solutions Partner, RSM; Kirsten Fox, Head of Employment Law Advisory, KPMG; Vanessa Houlder, Journalist, FT; Michael Izza, Chief Executive, ICAEW; Judith Knott, Independent Commentator; Laetitia Lynn, Head of Tax Communication Strategy, PwC; Caroline Macfarland, Director, Common Vision; Jolyon Maugham QC; Alastair McQuater, Partner, Buzzacott LLP; Paul Morton, Tax Director, OTS; Alex Metcalfe, Policy Advisor (Employment and Pensions), FSB; Thomas Pope, Economist, IFS; Hannah Reed, Senior Employment Rights Officer, TUC; Jonathan Riley, Partner, Grant Thornton; Chris Sanger, Global Head of Tax Policy, EY; Mathew Taylor, Chief Executive, RSA

Caroline Macfarland

Caroline Macfarland

Caroline founded CoVi in 2013 and leads our strategic direction and external engagement. She was previously managing director at ResPublica, one of the founding team members of the Power to Change foundation, and was a special advisor to the Big Lottery Fund. In 2015, she was named one of Management Today’s 35 women under 35.
Caroline Macfarland

@CarolineMacf

Director of @commonvisionUK - millennials think tank +common good consultancy. No views ever really 'mine' or 'yours'! RTs=worth considering even if dont agree
RT @commonvisionUK: "Tax ethics means considering PURPOSE, PRINCIPLES and PROCESS says @CarolineMacf in closing #TaxCoop2017 session @UNGen - 1 day ago
Caroline Macfarland

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