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Investigating the challenge of the UK’s shrinking tax base

Anita Monteith considers the UK’s tax base and where the UK’s income is going to come from, including what debt we may be leaving future generations

Taxline image 1I have lost count of the number of times I have listened to discussions about where the government should be spending more money: the NHS, education, infrastructure, defence? Rarely do people think about where it all comes from. We know it is tax receipts, but it is which tax, what leads to that tax and how much longer we can rely on it which concern me. I have three adult children. What debt are we leaving their generation and what resources will their future tax system have to cope with it?

The gig economy

One key problem we face stems from changing work patterns. I wrote earlier in 2017 in TAXline about the sharing economy and its labour subset, the gig economy, and it seems this topic is one which people beyond tax are now starting to engage with. That is good and they need to, because some of the inevitable tax changes ahead should be understood widely. The changes will be toxic politically without this understanding.

Public sector receipts 2017-18

Other (non-taxes): £54bn Other (taxes): £80bn Income tax: £175bn National insurance: £130bn Excise duties: £48bn Corporation tax: £52bn VAT: £143bn Business rates: £30bn Council tax: £32bn

National insurance (NI) is budgeted to bring in £130bn in 2017-18, nearly 18% of our income (see example above). Of this, a significant sum comes from employers’ NI contributions (NIC). Surely this must be under threat if the trend away from traditional employment patterns continues? I think it will.

If platforms such as Uber and Deliveroo can connect us to what we want through the internet, and if the people who make the deliveries and drive the cars are not employees for tax purposes, then employers’ NIC receipts will fall as our demands for these services rise. In the gig economy, most individual workers are regarded currently as self-employed for tax purposes. This isn’t automatically so, but in the absence of any statutory definition, most individuals who choose to work in this way, and those who engage them, will tend to presume this status and to construct their contracts of engagement accordingly. Control and substitution clauses abound.

We are told that increasing numbers of people want to work more flexibly and are using the internet to find working assignments. Many of these will be undertaken as self-employed contracts. As businesses put work out to tender, it is easier to access a wider market through the internet. While in the past a short-term employment contract might have been the result, it could be cheaper to just manage the project in house, but to have the work performed by self-employed contractors.

Taking this a step further, the actual work could be done abroad with no UK tax due at all. So where this leads is reduced NI receipts as employers’ NIC is no longer relevant to the labour used.

In a recent report, Good Work: The Taylor Review of Modern Working Practices, Matthew Taylor, chief executive of the RSA, was asked to consider how employment practices need to change in order to keep pace with modern business models. He was challenged to promote a national conversation and explore how we can all contribute to work that provides opportunity, fairness and dignity. Although he was not asked to consider tax, ICAEW and others made representations that he should and some tax aspects have been included in the report.

The Taylor review has looked at my first concern, and suggests that those with employment law ‘worker’ status should be given more employment rights and be renamed ‘dependent contractors’. It seems a small step intellectually to expect these rights should have to be paid for – through higher NIC. Perhaps we will see employers’ NIC or a similar levy imposed on payments to this group? This would protect the tax base in the event of a bigger shift towards businesses using self-employed contractors. Politically it would be challenging to achieve, as the chancellor, Philip Hammond, has already discovered, and I can hear the cries of “what about the admin burden?” already. But something needs to happen because we can’t afford for it not to.

Other taxes

We hear a lot about corporation tax and permanent establishment, which is what the BEPS project is focusing on. But a tax we hear relatively little about is business rates, yet they are expected to contribute £30bn to the UK’s treasure chest this year. If workers are able to base themselves at home, office workspaces can be smaller. If businesses award contracts in smaller units, so supporting smaller enterprises (a good thing), the business rates associated with the required premises will be less. If the trend towards internet use to do business continues, then surely businesses will be able to move to where costs are lower, or may do without business premises altogether? The high street may be needed for some types of business, but possibly a diminishing number. I am sure many consumers already use traditional shops to window shop, but then buy more cheaply from the internet.

Large businesses which need less road frontage can relocate as time and costs permit. Many small businesses could do likewise, although with rates relief, this is arguably a smaller risk to current revenues.

Who will lose out from this tax reduction? As councils are allowed to collect and retain more of what they collect from business to fund their local expenditure, the risk appears to rest with local government. This lost revenue will need to be recovered in some other way if local services are not to be cut.

Other threats

I do feel that I am being something of a harbinger of doom, but while I am enjoying a jolly good worry about the future, I have another concern. We are an ageing population. We can see the statistics pointing to this very clearly, and in August 2016 the Office for National Statistics said: “The population of England is projected to grow by 4.1 million (7.5%) by mid-2024. The projected growth varies considerably by different age groups. The fastest-growing age group (people aged 65 and over) is projected to grow by 20.4% over 10 years and by nearly 60% over 25 years in England. This age group is projected to increase both in absolute and proportionate terms. This means that not only is this population group projected to continue to grow, but also the share of this age group of the total population is projected to get larger.”

As the proportion reaching retirement age (which will rise to 67 by 2028) grows, the number of working age people will shrink as birth rates decline. This is a concern because UK state pension payments are funded through the tax and NIC paid by those of working age. And there will be fewer of those.

That takes me back to the work that the reduced number of workers will be doing by then. If they are moving towards self-employment, they will be paying less NIC, as will those who use their services. Who will pay the pensions of the elderly?

Conclusion

I would not claim to be a statistician, nor an economist, but I do know trouble when I see it. What can we do? I think politicians have some very difficult decisions to make and will have a hard time selling them to a public that doesn’t understand what is happening. We can educate and help to explain where we can. It isn’t about politics, but a look at the legacy of debt we are leaving the next generation. The self-employed/employed tax differential has to be addressed, but we must also take a longer-term look at our shrinking tax base more widely. Then deal with it.

About the author

Anita Monteith is the technical lead and senior policy adviser at the Tax Faculty