In this light, it was always expected the service user decides status rule would be extended to private sector businesses. And so it was, effective April 2020. This time the penalties and interest if you get it wrong are for real. And they will be charged on the employer, who bears the risk of error in a field where outcomes are uncertain and definitions absent.
Then in September the Prime Minister announced 1.25% NI increases for employers and employees, to start next April, thereby taking the benefit of using non-employed workers to 15.05% of payroll. The elephant just got bigger. For many companies facing new pressures in the strange post-COVID commercial world, 15% is a lot of money. Will the penalty risk of getting status wrong be sufficient to deter businesses from seeking to save it?
Many commentators think the ability of contractors to pay themselves by way of dividends is at the root of the drive away from employment. This is not so. It is the service users that drive it. They stand to save much more. So for IT and some other work fields, no work is given unless the worker contracts by way of a personal service company (PSC) or an ‘umbrella’ company with many IT contractors.
By now, the elephant filling the room is in full view. Employers’ NI prevents a level playing field between employment and self-employment. Furthermore economists recognise this as a tax on employment that impedes growth.
In recent years the gap between NI for employees and for self-employed has reduced. Alone, this isn’t sufficient incentive to play the system. Employers’ NI is demonstrably sufficient – so can it be phased out? This year it is budgeted to yield almost £80bn, a massive 9% of total government revenues. From April this will rise to £88bn. That represents 14p on income tax, or 14% on VAT. So-called stealth increases by successive governments have dug Britain into a hole; this much income will not easily be replaced. But can a start be made?
- NIC should be charged on dividends received from PSCs and umbrella companies as these are earnings from work.
- Mr Johnston has extended the new 1.25% charge to dividends. Prior to the 1980s, investment income was charged at higher rates than income from work. Today it is the reverse. So why not go further and charge NI on all personal investment income? As well as providing badly needed revenue, this would reinstate equity.
- The retired benefit disproportionately from health and welfare expenditure. Together those account for an ever-rising 43% of total government spending. Whilst electorally unappealing to the present government, the old should be paying more for this. As well as charging NI on investment income, the new 1.25% NI charge on pensioners who work should be the full charge. There is no longer any case for exemption.
- Corporation tax could raise £70bn in the current year. At a fixed rate of 19% there was large scope to increase this. Unfortunately Mr Sunak took up this slack in his March Budget by announcing phased increases to 25% for businesses with profits exceeding £250,000pa and a tapered increase for those above £50,000pa. But in principle, it would be sound policy to start to replace employers’ NI with higher corporation tax. This would maintain the cost in the corporate sector.
- CGT. Mr Sunak has reserved his widely anticipated CGT increases (he calls it ‘reform’) for reducing COVID related loans, so there is little scope here. In any case, CGT currently only brings in £10bn a year.
Finally, uncertainty caused by incessant friction between employed and self-employed statuses must end. There is no statutory definition of either term. Differentiation is determined only by the courts, necessarily in cases with different facts so that the principle of precedent can do little to resolve the question generally. Further, what reliable precedent there is has developed differently in tax, employment, and social security cases. Certainty can only be provided by a unified exhaustive statutory definition.
Given the fiscal benefits of self-employment, there is however a danger that government would choose a restrictive definition that treated as many people as possible as employed. This would need to be resisted. Resistance would be easier if the tax gap is first narrowed.