New ways of working are reshaping all our lives. How can tax policy keep pace and help smooth a difficult social and cultural transition at the same time as maximising revenues?
The way many of us work has changed out of all recognition in the past two years, with working from home and hybrid working seemingly here to stay. Collectively, we have undertaken the biggest labour market experiment since the Industrial Revolution and the results appear to show – for many, but certainly not all – that the old ways were not the best.
For some, the pandemic has been a liberating force, breaking the traditional stranglehold of a 9-to-5 office-based existence to provide new flexibility to juggle work and family life. For others, it has further weakened their shaky hold on job security and rights in a fast-changing, technology-driven economy.
According to the most recent Office for National Statistics (ONS) data from June 2021, 85% of working adults currently homeworking want to use a ’hybrid’ approach of both home and office working in future. While a few notable employers are calling back their workforces to the offices on a full-time basis, a consensus appears to be forming that a more flexible approach combining office-based collaboration with remote working is likely to be more cost effective and productive.
With COVID-19 and its associated economic fallout, a growing climate crisis, and the ongoing realignment of global trade, Professor Andy Lymer of Aston Business School believes we have unprecedented conditions that could lead to genuine change, listing: “The coming together of accelerated changes in technology that COVID-19 has driven further and an acceptance among a huge part of the population that working in an office wearing a suit may not necessarily be the most efficient way of working.”
Tom Pope, Deputy Chief Economist at the Institute for Government, points out that the trend towards more flexibility in employment that emerged 15 years ago means the tax system must change, too: “The trend of 10 to 15 years before the pandemic was a move towards greater self-employment and, in general, more flexibility,” he says. “Our tax system is ill-suited to that in the sense that we tax employees more heavily than the self-employed or company owner-managers, to the extent that there is a trend that shifts away from employment towards other forms of work, which effectively erodes the tax base.”
While income tax is easily the single largest source of tax revenue, its relative importance has changed over time. According to the Institute for Fiscal Studies, after decades of flux, “since 2010, income tax has experienced a relative decline in importance as a result of large increases in the tax-free personal allowance”.
The aim, therefore, says Pope, must be to design a future tax system robust enough to withstand current and future change, and by doing so tax people in a similar way regardless of how they earn money. “That’s important for two reasons: one is just for the efficiency point – we don’t want people to change working practices just for tax reasons; second, for the stability and robustness of the tax base, so that our tax take going forward doesn’t depend on how people organise their work – it’s just about how much work people are doing.”
Andrew Harrop, General Secretary of the Fabian Society, sees clear danger in a more mobile workforce less tied to organisations and, by extension, to each other. He calls this the atomisation of work: “If there’s a big economic incentive not to have traditional nine-to-five employment with employees on the books, then the sense of comradeship and teamwork, with colleagues working together [disappears]. If you atomise work too much, you have very insecure work. If you have offshoring, the work might be done almost anywhere in the world. It’s all totally fragmented rather than long-term secure relationships.”
However, with 24% of companies stating in the June 2021 ONS survey referred to above that they intend to use increased homeworking in the future, the world of work is changing rapidly.
Richard Morris is Chief Executive of IWG, the world’s largest workspace provider and parent company of Regus. He says there are huge gains to be had for individual and business productivity and employees’ wellbeing, as well as the ability of businesses to save money. “We see this pattern emerging of different places that people want to work in,” he says. “So, we think businesses will let their people work more locally and we’re seeing big demand in suburban and rural locations – 100% higher than before the pandemic in some suburban locations – and the use of city centres will probably change.”
Reform is in the air
Despite the practical difficulties facing tax and public spending reformers, it is clear that the pandemic has brought into focus a range of ideas that were previously dismissed for taxing work and supporting those on low incomes.
Proponents of reforming social welfare around a universal basic income model have been gaining traction politically, even if the implications that such an approach would have for tax systems have yet to be worked through. A range of ideas for wealth taxes, meanwhile – some more practical than others – are being debated in newspaper columns and online forums.
One idea that is gaining currency is that of combining income taxes and employee national insurance into a single tax. Not only would this simplify the tax system, but it would also address the anomaly that pensioners don’t pay national insurance on wages if they continue to work after the state retirement age – despite pensioners being the biggest beneficiaries of the welfare system.
These proposals aside, the disparity between employees, self-employed and company owners remains one of the key tax issues that reformers are most concerned about. Making the tax we pay on income seem fairer could be a popular move. “One thing that people universally hate is people dodging their fair share,” says Pope. “So, I think the more that campaigners can speak about, for instance, individuals who are extremely wealthy and who get paid through a limited company in dividends rather than through PAYE is incredibly powerful.”
Art of the possible
However, as Vince Cable, former Secretary of State for Business, Innovation and Skills, points out, the politics of the situation is never easy. An ideal tax system, he says, would involve “combining national insurance with income tax [but] no real-world politician would ever dare to go anywhere near that because you create a lot of losers among the higher- and middle-income people, and top-rate taxpayers suddenly start paying National Insurance at 12% [rather than 2%]. So, in the real world, radical change is very, very difficult to achieve in this kind of political context.”
Such a solution would also still not solve the problem of employers’ national insurance, which applies to workers engaged as employees while self-employed labour attracts no such additional cost. While the nature and type of relationship between the engager (ie, the employer) and worker is different, this difference in the cost of labour based on legal form is responsible for considerable complexity in the tax system that a more aligned system would remove.
One of the silver linings of the pandemic has been how resilient the workforce has been despite everything it has had to cope with. Businesses have adapted and the world of work has changed accordingly – making the existing flaws in the tax system even more evident.
For policymakers, the difficulty will be in how to reform taxes in a way that encourages greater productivity, while at the same time maintaining tax revenues to pay for an ever-growing list of policy challenges.