Picture a company of thirty years ago. The company hires 100 employees – all of whom work within rented offices. The doors open in the morning, they work an 8 hour shift and they close when the day is up. The company pays tax on its profits, on the property, and national insurance (NI) on its employees. Crucially, the company also deducts and collects the tax and NI paid by the employees. All this tax is paid at regular intervals to the Government, which need do no more than occasionally cast an eye over an auditor’s report. Halcyon days for the Inland Revenue.
Fast forward to the present day. The company still exists, but it looks very different. There is no building in which employees can be seen hard at work – everything is online and the headquarters is a much smaller office, perhaps even a P.O. box. Staff work from home or in remote locations and the number of employees has been reduced to a core of ten while independent contractors and suppliers do the bulk of the heavy lifting. Corporation tax is still paid but at a much lower rate. The employers’ NI bill has been slashed by 90% and there’s no requirement to collect tax on most of the people providing the labour – HMRC have to go after them individually.
For the company the change has been hugely positive. It’s more agile and dynamic: it can react quickly to market demands. The self-employed work force they engage like it too. They have more freedom and can mould their working hours around their personal lives and other work commitments. Because the company is more efficient, it can provide better value to its customers and better returns to the shareholders.
The downside? A huge headache for HMRC. The dramatic shift in the way many of us now work, which has taken place over a very short space of time, has created significant challenges for tax collection. But this isn’t the fault of the business which is only doing what businesses must always do – ensuring they remain competitive, while also complying with laws and regulations of course. The challenges faced by HMRC are an inevitable consequence of applying a twentieth century tax system to the modern world of work. It doesn’t fit and as technology drives further change, the problems are likely to get worse before they get better.
Fortunately, this issue has recently grabbed political attention. The Matthew Taylor review published earlier this week acknowledges the ambiguity and confusion created by current tax law and makes the case for some bold reforms. Taylor even suggests there could be some kind of equivalent to employers’ NI which could be applied to companies which engage labour on a self-employed basis.
But there’s no simple solution here. Whatever gets proposed will be attacked from one detractor or another. Nevertheless, it’s becoming increasingly clear that no-change isn’t an option either. The Office of Budget Responsibility said last year that people working through their own incorporated entity will cost the Exchequer £3.5 billion by 2022, and then there’s the much bigger population of sole traders which also has a huge impact on the overall tax yield. So we can expect this issue of how we tax companies and particularly, how we tax labour, to be discussed and debated a great deal over the months and years ahead.
IPSE will be pressing for a system that recognises the tremendous value the self-employed add to the UK economy. The flexibility they provide and the specialist skills they bring give the UK one of its greatest competitive advantages. We cannot afford to implement a tax system which dampens the vibrancy of the self-employed sector or discourages companies from engaging independent workers.
Instead we need a tax system that recognises the way we work has changed and that can accommodate different models of labour provision. In short, we need a tax system that fits with the way we work now, not the way we worked thirty years ago.