We need to change the way we tax work, says KPMG. Changes will need to be wide ranging and will go to the very core of the UK tax system
All signs seem to be pointing to a significant announcement in the Spring Budget around the future, strategic approach to the taxation of labour; a topic which has been receiving a great deal of attention recently.
In a nutshell the question boils down to how we should tax employees and the self-employed in the new world of the gig economy and whether the differences remain justified at a time when the traditional distinctions between employment and self-employment are increasingly falling away. Indeed many would say it’s now high time to take stock of the tax and national insurance contributions (NIC) position and level the playing field rather than continuing to require businesses to do the near impossible in divining precisely on which side of the line people fall.
Colin Ben-Nathan, Tax Partner at KPMG in the UK, commented
“We think it will be vital to have a full and open consultation on how to move forward in considering how to tax labour in the 21st century. Tinkering around the edges is not going to cut it - this is a fundamental issue which needs careful thought at a strategic level. The Chancellor’s letter to the Office of Tax Simplification (OTS)1 at the time of the Autumn Statement declining the recommendation to align income tax (IT) and NIC acknowledged this and hopefully indicates an understanding of the scale of the problem.
“This means changes will need to be wide-ranging and will go to the very core our tax system. In reality there is no quick fix and it may well be that changes will need to be phased in over a number of years.”
The question of “how we tax work” sits right at the heart of our tax system and indeed there are wider and longer-term issues that will also need to be addressed. For instance, there are inconsistencies between employment law and tax law particularly around the concept of a “worker“, which is a status not recognised under tax law. An individual may be a worker with basic employment rights but could potentially still be taxed as self-employed. This can be a very confusing prospect for businesses and it means they can be exposed to risk in not accounting for PAYE and NIC if they fail to divine correctly which side of the employment/self-employment line people fall. And this is becoming an increasingly complex judgement to make given the way people work these days in the gig economy.
In the near term, it remains to be seen how far the Government will go. Certainly the tax and NICs position is, at the least, in the headlights at the moment. Indeed the Government has said it will “look at how it can ensure that the taxation of different ways of working and different forms of employee remuneration is fair, sustainable and efficient”.1
“I think that if we narrowed the fiscal differences between employment and self-employment then we could move away from the increasingly complex and administratively burdensome sticking-plaster approach that we see at the moment. By simplifying things and levelling the tax and NICs playing field life would be much more straightforward for individuals and business alike. And by considering alternatives to employer’s NIC we would also be helping to preserve jobs too – now that surely would be a vote-winner!”
1 The Chancellor‘s letter to the Office of Tax Simplification dated 23 November 2016
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