If you were a government designing a tax system from scratch you would want it to:
- bring in large amounts of revenue;
- bring in predictable amounts on a regular basis;
- require minimum amounts of government intervention to collect;
- apply to a large number of taxpayers; or
- be difficult to avoid.
The nearest approach to this in the UK is PAYE and NIC. In 2015-16, 48 per cent of all tax revenues came from employment taxes. Monthly PAYE and NIC receipts are the absolute bedrock on which the UK economy depends and a threat to the stability of the system risks undermining the country’s financial stability.
The problem that the government faces is that there are now huge pressures on PAYE and NIC, each of which is significant on its own but which cumulatively could fundamentally affect the tax base. Some of those include:
- the emergence of the so called ‘gig’ economy. The Uber decision makes it clear that the old employed/self-employed distinction is not binary: there is a third category of ‘workers’, who are neither employees or self-employed. The tax system doesn’t yet deal properly with this important group;
- the continued use of personal service companies. The IR35 legislation, which was supposed to tackle the issue, has been on the statute book since 2000 but in practice it has had very little impact;
- remuneration arrangements involving complex offshore structures, loans and third party vehicles, which continue to be promoted; and
- the popularity of salary-sacrifice arrangements. Many, though not all, of these will result in a reduction in tax liabilities.
I could go on but the point is made. The PAYE and NIC system, which was designed for a very different labour market, is straining at the edges and is in need of fundamental reform. The Office of Tax Simplification has taken a strong lead here. This week it has published a very thoughtful and well researched document on PAYE and NIC alignment for employees.
HMRC has also been consulting in some of these areas - for example on the use of personal service companies in the public sector and on PAYE avoidance via disguised remuneration. So I will be looking closely at what the government has to say about the future direction of employment taxes.
What is really required is an overarching review of the whole basis of the employment tax system. What we have at the moment will not collapse tomorrow, but over time it will become more and more distant from the reality of modern employment practices. Now is the time to have a root and branch reform of the whole structure. Will the Chancellor be brave enough to fire the starting pistol? I hope he will.
For more information please get in touch with Andrew Hubbard, or your usual RSM contact.