With the publication of the review into employment practices in the modern economy by Matthew Taylor expected in a matter of weeks, there has been significant comment that the issue of taxation and National Insurance must also be considered. The Taylor review will not address the tax implications of the various employment practices but it has already been disclosed that the differences in tax treatment are a key driver behind the trends we are observing.
We have a great opportunity when examining modern-day work practices to also consider how the tax system could be modified to take any recommendations into account. One of the key aspects is whether the tax system should aim for a completely level playing field between employment and self-employment such that taxation does not become a factor from the ‘worker’s’ perspective. Alternatively if there are differences then the tax system should be significantly redesigned so that there are clear definitions around the various classes.
It has been shown that an employee is currently more heavily taxed than either someone who is self-employed or who provides their services through a personal service company. In addition, their employer also pays employers’ NIC which mean the effective ‘tax’ from an employment is considerable – almost 60 per cent more than a self- employed worker.
In addition, the tax and NIC is collected via the PAYE system which means that HMRC receives the funds regularly, efficiently and with very little intervention.
These two points are going to be crucial to any government in the future as it will wish to protect and possibly increase the tax take and also ensure that it is delivered without an increase in HMRC staffing. If self-employed numbers are on the increase because of this then HMRC will need to consider how it will effectively manage a greater ‘self-employed’ population even with the introduction of ‘Making Tax Digital’.
There is also the disparity between the payment of NIC and also the benefits enjoyed by the worker population. If workers are to have both sick pay and maternity pay then these are benefits that require a secondary contributor (employer) under the National Insurance scheme. If this was to go ahead then the Chartered Institute of Taxation has suggested that businesses could perhaps pay a new ‘business social contribution’ to ensure fairness to all. This suggestion has its merits as, if we are to provide greater benefits to workers, these must be financed in some way and a radical departure from the current system may well be needed.
For more information please get in touch with Graham Farquhar, or your usual RSM contact.