(Acknowledging the elephants in the room)
Yesterday was the long-awaited Autumn statement or was it the Autumn budget, whatever Jeremy Hunt called it, we all knew weeks ago it was coming and would be bad news. And as is the way with such events, the devil is in the detail, so my analysis of the measures announced will have to wait for 7 days, to give me the opportunity to study the plethora of accompanying documentation to the big announcements.
And so to this week’s Blog, where I will be looking at the two of the principle reasons for the mess we currently find ourselves in; which everyone knows are there, but avoid acknowledging their presence, namely Brexit and National Insurance Contributions (NIC).
Elephant No.1: Brexit
The Organisation for Economic Co-operation and Development (OECD) has predicted that growth in the UK economy will be approximately zero in 2023, which will be the worst performance of any economy in the G20, with the sole exception of the sanctioned pariah state Russia. With the news last Friday that the UK’s economy went backwards by 0.2% last quarter, breaking even in 2023 could be an overestimate.
The OECD has made it clear that the primary reason for our poor economic performance, is the damage caused to our economy by Brexit. The Office of Budget Responsibility has concluded that Brexit will overall, cut the UK’s GDP by 4%. That’s around £100bn every year of economic activity that is not happening, resulting in around £40bn of tax revenue not delivered to the Treasury, year after year.
It is vital that we take action to reverse this immediately and my first suggestion is to lift all restrictions that apply to people coming to work in the UK from EU and EEA countries. We need these workers in our NHS, our care homes, in construction, hospitality and farming. Employers in nearly all sectors of our economy are finding it difficult to fill the roles they advertise, which is restricting their ability to grow.
I am not advocating a rerun of the 2016 Referendum, but The UK government should urgently consider opening negotiations to re-establish freedom of movement of UK and EU citizens between our countries, which would then give us the option of joining the EU Customs Union & Single Market, or Brexit Light if you will.
Elephant No.2: National Insurance
The second elephant is the enormous cost to employers of NIC; and unless Jeremey Hunt changes the rates, it is currently an eyewatering 13.8% on every penny an employee is paid above £175 per week. This is nothing more than a tax on employment, distorting the labour market and drives workers and employers to use artificial structures to avoid this tax. ‘
Various governments have brought in complex rules to discourage the avoidance of NIC, so perhaps we should consider abolishing it and replacing it with a revamped income tax, with the current tax merged with all classes of NIC to have one single tax, say at 30% to begin with. The goal would be to have one set of income tax rates that will apply to all types of income from earnings, trading, property, pensions and dividends, with no reduced rates merely due to a person’s age.
The State Pension
If my suggestion on tax/NIC is implemented, there will be a knock-on effect on state pensions. Currently Classes 1 & 2 NIC allows an individual to build up credits towards the state retirement pension. So, once NIC and income tax have been merged, an individual could receive a credit towards their state pension if they have been subject to tax for say 60 hours per month. Individuals will then be able to build up credits month by month, rather than having to accrue a full year of credits to achieve a ‘qualifying year’
Those individuals who pay no tax will be able to pay a voluntary tax to secure their state pension credit for a particular tax month or year, with the usual credits for those on maternity leave or on state benefits.
Employers will be required to record the hours employees have worked in the pay period, on the monthly RTI return and you’ll be able to view this information, plus what pension credits you’ve accrued, in your online personal tax account. Also, I would remove the exemptions for Directors of personal service companies.
And before you start thinking that I’ve given employers a big bonus by removing NIC, I would replace it with higher rates of corporation tax.
Office of Tax Simplification (OTS)
Now that the OTS has been reinstated, I would give it more powers to initiate studies into simplifying the UK tax system further and also give them the additional mandate to conduct an audit of any new tax proposals, before they are legislated for, to assess their practicality and effectiveness.
Whilst I accept that HMRC’s flagship Making Tax Digital (MTD) will proceed as planned, I would only initially include larger companies in the requirement to report income and expenses quarterly, as these are best able to bear the additional costs. Small/micro companies, partnerships and sole traders can then be included at a later date as this principle has already been proven to work well with MTD for VAT.
Tax Accountant’s view
If you have been a reader of my Blogs for a while, you will be aware that I have promoted the cause of combining income tax & NIC before, something that the vast majority of tax professionals agree with. I also believe by extending this to employers by combing Corporation Tax with Employers’ NIC, it would be much fairer, with struggling businesses, especially in the hospitality sector, not paying tax whilst they’re not making a profit.
So, Messrs Sunak and Hunt, why not take up my suggestion, it will save millions in bureaucracy, be easier to understand and almost certainly bring in more cash into the Treasury coffers. I commend this budget to you!