Tax and National Insurance
In his first official annual government budget “Our taxes should be efficient and support growth” stated the Chancellor of the Exchequer, George Osborne. “They should be simple to understand and easy to comply with and our tax system should be fair, reward work, support aspirations and ask the most from those who can most afford it”.
In July 2010, the government set up the new Office for Tax Simplification (OTS) to provide independent advice on how to reduce the complexity of the UK taxation systems – “a journey of exploration” into the world of small business taxation. Their brief is to “examine evidence, recommend priorities, consider their impact and product an interim report”.
OTS very much recognise that their task would be difficult and recognised that “you can’t please all of the people all of the time” as all areas of tax reform attract well-informed supporters clubs for HMRC and government to contend with - IR35 has proved to be their thorniest challenge.
The overwhelming conclusion of the report published in March 2011 is that genuine and long-lasting simplification can only be brought about through major structural changes to the UK tax system.
The two key areas identified:
- The integration of income tax and national insurance contributions (NICS), and
- Introducing a radical new approach to taxation of the very smallest unincorporated businesses.
As a result of this initial work undertaken by Michael Jack and John Whiting, the 2011 budget announced the abolishment of 43 complex reliefs including the millennium gift aid system (which is not needed for another 989 years), removed over 100 pages from the UK taxation manuals and begins the work of further simplification.
But there is one major further step that will dramatically simplify the tax system.
For decades we have operated Income Tax and National Insurance as two fundamentally different taxes and forced businesses large and small to operate two completely different systems of administration, with two different periods and bases of charge – the resulting anomalies are legion” and “imposes unnecessary costs and complexity on employers, and costs the taxpayer in the extra burden it places on HM Revenue & Customs.George Osborne, Chanceller of the Exchequer
So George Osborne announced “that the government will consult on merging the operation of National Insurance and Income Tax”. He went on to state that “I am not proposing we extend National Insurance to pensioners, or to other forms of income, or that we abolish the contributory principle – our purpose is not to increase taxes, it is to simplify them”.
The Institute of Chartered Accountants for England & Wales (ICAEW) set out ten principles for a good tax system:
- Easy to collect and to calculate;
- Properly targeted;
- Subject to proper consultation;
- Regularly reviewed;
- Fair and reasonable;
- and competitive.
Integrating income tax and national insurance contributions requires a series of integration steps to make alignment possible:
- Consistency in the definition of earnings
- Consistency in the required calculations
- Reliefs and exemption of their income tax or NICs
- Treatment of pensioners
- Treatment of self-employment
- Treatment of savings and dividend income
The current practice of continuing to maintain two separate regimes leads to anomalies that provide incentives to distort behaviours leading to decisions being taken that are wholly tax-driven and are complex, making little commercial sense. Reducing the anomalies reduces distorted incentives and simplifies the tax system.
The move towards a single tax and NIC system is claimed to result in significant administrative simplification, with reduced calculation complexity and fewer reporting requirements for self assessment and self employment returns. It is viewed by the OTS that HMRC costs would be reduced and less guidance required. This, of course, would also lead to less of a need for professional advice on tax-efficient remuneration from the accounting and tax profession.
But what about the contributory principle of NICs? It is viewed that the original rationale behind NIC acting as a social insurance system is becoming less relevant. The number of full years contributions for a full state pension has been reduced and the number of benefits which rely on the contributory principle is only six:
- bereavement allowance,
- job seekers allowance,
- employment and support allowance,
- incapacity benefit,
- maternity allowance,
- and the state pension.
The government proposal for a universal flat rate pension will further reduce the link to paying NICs.
Look forward to further consultation on the proposals.