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Treasury Committee report threatens tax raid on UK’s self-employed

Government has come under scrutiny after an inquiry seeking ways to mitigate the financial damage caused by the Covid pandemic appears to propose a tax raid on the self-employed.

The latest report from the House of Commons Treasury Committee’s inquiry titled Tax after coronavirus calls for a review into reforming taxation of the self-employed, describing the current system as ‘confused, unfair and unsustainable’.

The possibility of potential tax hikes will sound ominous to contractors, many of whom are already bracing themselves for the fallout from the Off-Payroll rules. As ContractorCalculator CEO Dave Chaplin observes, though, consequent action is far from certain:

“This is yet another report that calls for a review on examining how the self-employed are taxed. We’ve had so many of these in the last decade that one now begins to lose count. As is often the case, this call for a review may simply be a way of kicking the issue into the long grass.”

Off-Payroll impact overlooked in Treasury report

Despite being chaired by Mel Stride MP, the man who oversaw the progression of the Off-Payroll rules and the controversial Loan Charge through Parliament while serving as the Financial Secretary to the Treasury, the Treasury Committee’s report failed to acknowledge either piece of legislation or their effect on the self-employed.

The omissions are all the more contentious for the fact that both Off-Payroll and the Loan Charge featured prominently in the written evidence gathered from stakeholders to inform the inquiry.

“It’s disappointing but unsurprising, unfortunately, that this Government is proposing tax hikes on the self-employed before the full impact of the Off-Payroll rules is even realised, and that Off-Payroll apparently doesn’t even factor into the matter,” notes Chaplin.

“It’s also interesting to observe that the report expresses a reluctance to mitigate the economic damage of Covid by introducing a windfall tax on firms and sectors that have benefitted financially from the pandemic due to its ‘potentially retrospective nature’. If this is grounds upon which to reject policy, then I wonder when we can expect the withdrawal of the Loan Charge.”

Report fuels ‘blinkered’ view of self-employment

The omission of the Off-Payroll rules and the Loan Charge from the conversation is symptomatic of a Government that refuses to consider matters holistically, further evidence of which the Treasury report provides. Much discussion focused on perceived inconsistencies between tax contributions under different forms of employed and self-employed work, though the report fails to entertain a balanced debate.

Two factors often used to justify the modest tax advantages that contractors benefit from are the lack of job security that they endure and the fact that they aren’t afforded the same rights as employees. However, these details were granted meagre consideration within the report, and the evidence that did address them was generally dismissive.

Professor Judith Freedman, Professor of Taxation Law and Policy at the Faculty of Law at Oxford University, provided one example when discussing the additional risks taken by the self-employed, stating:

‘The tax system is a very poor vehicle for reflecting that risk because some self-employed take on risk, but some take on very little or no risk. Therefore, if you use the risk argument, it does not work well. Some employees are in very risky and precarious employment, for example. Risk is not related to the amount of tax being paid under the current system.’

For Chaplin, considering issues in isolation is contributing to a blinkered view of the tax system: “This report looks at an extremely narrow range of issues when considering the disparity in taxes. While the Treasury appears to have cherry-picked many quotes which suit its agenda, factors such as the unique way contingent workers benefit the economy were omitted from the discussion altogether. How are we to reach a fair outcome based on this approach?”

Treasury continues to overlook ‘elephant in the room’

Also included within the report is a graph from the Institute for Fiscal Studies (IFS) comparing the tax due on three jobs generating £40,000 - one performed by an employee, another by a self-employed sole trader, and the third by a limited company contractor.

The graph shows that the total tax raised from the employee falls just shy of £12,000. Meanwhile, the tax claimed from the self-employed sole trader marginally exceeds £8,000, whereas the limited company pays a little under £8,000 in tax.

Though seemingly intended to support proposals for heightened taxes on self-employment, the graph used is misleading for various reasons. The most notable of which is employer’s National Insurance Contributions (NICs), described elsewhere in the report in evidence provided by John Cullinane, Tax Policy Director of the Chartered Institute of Taxation (CIOT), as “the elephant in the room”.

When employer’s NICs are removed from the equation, the graph shows that the tax yielded from all three engagements hovers around the £8,000 mark, with self-employed sole traders paying the most out of all.

Even when only considering the taxes paid by the individuals themselves, issues remain, as highlighted by Chaplin: “This graph effectively compares apples and oranges as it fails to acknowledge the fact that limited company contractors typically charge significantly more than their employee counterparts, meaning they contribute more in tax.

“Even without acknowledging ‘the freelancer premium’ when comparing effective rates of tax for contractors and employees earning in excess of £50,000, it is contractors who contribute more, which ContractorCalculator has shown previously,” Chaplin adds. “The 2016 dividend tax hikes have all but wiped out the modest tax advantages that limited company contractors had enjoyed.”

Treasury urges ‘major reform’ of self-employed taxation

Despite the facts at hand, the report narrative continues to focus on the supposed ‘tax advantages’ enjoyed by the self-employed, concluding: ‘We believe that if the tax advantages of self-employment were to be reduced, then the tax advantages of running a limited company should be considered for reduction relative to the taxation of employees under PAYE.’

Ultimately, the report recommends a ‘major reform of the tax treatment of the self-employed and employees’, adding: ‘The current system is confused, unfair and unsustainable. The review should incorporate the benefits which accrue upon payment of NICs and other taxes as well as the level, the incentives and the interaction of such taxes. It should look as far as is possible to eliminate the so-called ‘three person problem’ altogether.’

Elsewhere, in outlining its proposed priorities for tax reform, the committee surmises: ‘Evidence to this inquiry is clear that differences between income tax and national insurance contributions create distortions and unfairness… The Government should consider what can be done to remove the distortions gradually through time.’

For Chaplin, this is a curious claim: “The report itself doesn’t highlight any evidence of ‘distortions and unfairness’. This sounds more like an assertion; in which case we urge MPs to read into the matter rather than blindly voting through any potential policy that may arise as a result.”

Reassuringly for the UK’s self-employed, the promise of subsequent policy is by no means certain, with Government likely conscious of a potential backlash, as Chaplin highlights:

“This is a hard problem, and any solution will create considerable distortion with winners and losers. Because of the short five-year Parliaments, no Government ever wants to be brave enough to make the changes required because it’s a sure-fire election loser. In my view, central to any change needs to be cast iron tax certainty for firms, otherwise they won’t site themselves in the UK.”

Published: 01 March 2021

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