Tax incentives – the start of a debate?
The tax community has long been exercised about the differences in taxation/NI between the employed and the self-employed. In 2010, the IFS’s Mirrlees review recommended reducing the distortions by moving towards greater neutrality. By the time the review was published, the distortion had been exacerbated by an increase in employer NI to 13.8%! More recently the IFS called for alignment of taxation across legal forms in its 2017 Green Budget chapter on Tax, legal form and the gig economy.
So it was good to see the government-commissioned Taylor Review (“Good Work”) recognising the impact of the distortion. The report concludes, in general terms, that more equal treatment would be “fairer, more economically efficient and would support better quality work”.
More specific recommendations on tax would have been beyond the review’s remit and in any event would not have been sensible, in my view, for two reasons.
Firstly, as we have seen in recent months, changes to the NI of the self-employed are contentious and politically high-risk. It is unlikely that the government, distracted by Brexit and with a wafer-thin majority propped up by the DUP, would have the courage to start addressing the distortion during this parliament.
Secondly, any review of the taxation of the self-employed would have to consider an even greater distortion: the tax advantages that incorporated businesses enjoy. There are also VAT issues that could be thrown into the mix.
Given the political realities, the next few years could provide an opportunity for a wide-ranging debate on these controversial and complex tax issues. This could involve interested parties from industry, trade bodies, unions and civil society as well as politicians, with the aim of developing a broad and (ideally) cross-party consensus on the direction for reform.
Technology – enabler or enforcer?
The Taylor review also touches on tax in relation to how technology can support compliance. For example, it suggests government accreditation of platforms to support cashless transactions. The review sensibly favours a voluntary approach, at least for now. But there is an ominous suggestion that this might be the springboard for a future “much more radical move towards promoting cashless transactions”.
There have been signs that the government might wish to take a more coercive stance towards the use of technology, for example in the “Making Tax Digital” programme. But it was interesting to see the announcement last Thursday that the timetable for requiring businesses to keep digital records has been deferred to address concerns expressed by the Treasury Select Committee among others.
One major concern is cyber-security. Requiring companies to keep digital records may expose small businesses to risk of cyber-attack by forcing them to go online. The government’s response so far has focused on HMRC’s own cyber-security. While this is important, it rather misses the point: how can businesses protect their own records? The government needs to show it is taking this issue seriously before any more radical moves are contemplated.
This article first appeared in CoVi’s Responsible Tax Lab blogs, following a round-table with Matthew Taylor on 13 July.