We need a new tax system: the current one is broken beyond repair
- 14 Nov 2019
- Andy Chamberlain
Picture a company of thirty years ago. The company hires 100 employees – all of whom work in rented offices. The doors open in the morning, they work an 8-hour shift and they close when the day is up. The company pays tax on its profits and the property, and national insurance (NI) on its employees. Crucially, the company also deducts and collects the tax and NI paid by the employees. All this tax is paid at regular intervals to the Government, which need do no more than occasionally cast an eye over an auditor’s report. Halcyon days for the Inland Revenue.
Fast forward to the present day. The company still exists, but it looks very different. There is no building where employees can be seen hard at work: everything is online and the headquarters is a much smaller office, perhaps even a P.O. box. Staff work from home or in remote locations and the number of employees has been reduced to a core of ten while independent contractors and suppliers do the bulk of the heavy lifting. Corporation tax is still paid but at a much lower rate*. The employers’ NI bill has been slashed by 90% and there’s no requirement to collect tax on most of the people providing the labour: HMRC have to go after them individually.
For the company, the change has been hugely positive. It’s more agile and dynamic: it can react quickly to market demands. The self-employed workforce they engage like it too. They have more freedom and can mould their working hours around their personal lives and other work commitments. Because the company is more efficient, it can provide better value to its customers and better returns to the shareholders.
The downside? A huge headache for HMRC. The dramatic shift in the way many of us now work, which has taken place over a very short space of time, has created significant challenges for tax collection. But this isn’t the fault of the business, which is only doing what businesses must always do: ensuring they remain competitive, while also complying with laws and regulations, of course. The challenges faced by HMRC are an inevitable consequence of applying a twentieth century tax system to the modern world of work. It doesn’t fit and as technology drives further change, the problems are likely to get worse before they get better.
The continuing debacle that is IR35 is a glaring example of one such problem. What the off-payroll rules – as IR35 now seems to be known – seek to achieve is to place a large population of ‘non-traditional taxpayers’ back into the PAYE system. The government desperately wants to stem the steady flow of people leaving the employment taxes regime, and indeed, is actively trying to shove those who have already deserted back into it. There is a big problem with this plan: these people are not employees, do not want to be employees and the companies they work with are not, and do not wish to be, their employers.
Rather than trying to force people to work in a way that fits an out-of-date tax system, we should be devising a tax system that fits with the way people want to work. You cannot put the genie back in the bottle. Our workforce has changed and as technology continues to develop, so too will our working habits. The tax system will have to develop and change with them.
But there’s no simple solution here. Whatever alternatives are proposed will be attacked from one detractor or another. Nevertheless, it’s becoming increasingly clear that no change isn’t an option either. The Office of Budget Responsibility said (somewhat recently) that people working through their own incorporated entity will cost the Exchequer £3.5 billion by 2022, and then there’s the much bigger population of sole traders which also has a huge impact on the overall tax yield. So, we can expect this issue of how we tax companies and particularly how we tax labour, to be discussed and debated a great deal over the months and years ahead.
In our 2019 manifesto, IPSE has called for a wide-ranging review of small business tax, scrapping IR35 and ending confusion over the Loan Charge in order to unleash the UK’s entrepreneurial spirit. After that will come the difficult task of putting in place something new that works for self-employed people while also protecting revenue for the Exchequer.
We will be pressing for a system that recognises the tremendous value the self-employed add to the UK economy. The flexibility they provide and the specialist skills they bring give the UK one of its greatest competitive advantages. We cannot afford to implement a tax system which dampens the vibrancy of the self-employed sector or discourages companies from engaging independent workers.
Instead, we need a tax system that recognises the way we work has changed and that can accommodate different models of labour provision. In short, we need a tax system that fits with the way we work now, not the way we worked thirty years ago.
*In 1989 Corporation Tax was 35% for medium and large companies; 25% for small companies
The Corporation Tax rate peaked at 52% in 1982
Corporation Tax is currently 19%. It will be 18% from April next year
Meet the author
Deputy Director of Policy and External Affairs