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Will Tories Dismantle IR35?

Tax and NIC integration back on the table

With the general election less than a year away, the Times newspaper has reported that the Conservatives are planning to include the integration of tax and NIC in their manifesto.

Apparently, Chancellor George Osborne was extremely close to implementing harmonisation of the two taxes in Budget 2014 and was only halted by concerns over merging two computer systems. A source speaking to the Times said, “We came within a whisker of doing this at the last budget, but in the end we decided against it. They (tax and NIC) are currently on two separate computer systems and we thought the risk was just too great. But it’s something we could do in the next summer.”

A harmonisation of the systems would make sense as many people view NIC as a tax anyhow. It is also something that has support within the business community. A survey conducted by the Institute of Directors in 2012 showed that 79% of businesses were in favour of the idea.

There is concern however that such a radical overhaul would be perceived by the tax paying public as an increase in taxation, as basic rate income tax would rise from 20% to 32% and higher rate tax rocket from 40% to 52%. A campaign of public awareness would therefore be needed to encourage the electorate to buy into concept.

Presumably certain exemptions and reliefs would need to put into place so as not to prejudice certain sources of income, for example pensions, that are not subject to NIC.

In the last tax year income tax raised £156 billion making it the biggest single contributor to the Treasury’s coffers, with NIC coming in second, weighing in with £105 billion. The two sources of revenue are kept separate with approximately a fifth of NIC used to fund the National Health Service. The remainder four-fifths is allocated to a central fund to pay for contributory benefits, such as incapacity benefit and retirement pensions. As governments have imposed a system of means testing certain benefits however, this has corresponded with a reduction of social security spending on contributory benefits as a proportion of total welfare spending. In 1978/79 this was 60% but has since fallen to 40%.

In 2011 the Institute for Fiscal Studies Mirlees review concluded that NIC “no longer serves any purpose as a separate social insurance contribution linked to benefit receipt. Maintaining it as a separate tax serves only to create confusion and complexity.”

Certainly having one simpler tax rate would make it easier for people to understand their tax bill, especially given that taxpayers will soon be provided with a breakdown of where their taxes have been applied by the government over the past year.

Harmonisation of tax and NIC is not a new idea but following on from the Office of Tax Simplification’s recommendation in 2011 that this should be revisited in the long term, it appears it has gathered some momentum. If it does come to pass then IR35 looks certain to disappear, as the NIC savings on dividends would diminish. It’s enough to make a contractor see blue!

By Andy Vessey

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6 thoughts on “Will Tories Dismantle IR35?”

  1. Tony

    Andy,

    Your statement about the higher rate tax rising to 52% isn’t correct.

    Employee NIC contributions stop when higher rate tax starts, so at £41,865 so the current ‘real’ lower and higher tax rates are 32% and 40%.

    The real political issue is likely to be the public’s realisation that the difference between the new basic rate and the ‘fat cat’ higher rate tax is only 8%.

    Ltd Coy Contractors who are outside of IR35 will pay the new 32% rate on dividend income that falls within the lower rate band.

    What’s not clear, to me at least, is what happens to Employers’ NIC under the new system. The gov probably won’t raise CT to cover employers’ NIC so they may just re-brand it. The fate of this form of NIC is more important to non-IR35 contractors, as it forms the bulk of the difference in income between being in or out of IR35.

    All the above is IMHO of course…

  2. Simon

    The reality is that they will have to have few years parallel running the tax with a new name – as per the suggestions in the Tax Payers Alliance reports. The reality is the Employers NI will need to be visible on the Employee payslip – with a corresponding increase in base salary. I can see why they would be nervous about public perception as it means the tax rates will become ridiculous. There’s a £5k band where the combined tax, employes and employers ni is 65% on income between 40 and 45k IIRC. One thing it means for contractors – you won’t be able to “avoid” paying NI, but will have to settle for paying the newer higher rate income tax. Should bag them a few extra millions (and that’s just from me, joking!)

  3. yanick

    [quote name=”Tony”]Andy,

    Employee NIC contributions stop when higher rate tax starts, so at £41,865 so [/quote]

    Actually, the employee NI doesn’t stop, but is reduce to 2%; making the “new” tax rates 32% and 42%. Your point about the two tax rates being perceived to be too close is a good one though.

  4. S K Ray

    If the Tax and NIC are indeed integrated, will the employers pass the savings in Employer’s NI contribution (which does not reflect in the payslip or in employment contract) to the employees? or it will simply add to the profit of the business.

  5. Mike

    This all hints at a need for a much wider review of personal taxation AND corporate taxation. We really can’t continue to treat smaller companies with disdain because they cant fight back. We need to fix the issue of large global companies taking profit in the UK but declaring it in a lower corporation tax haven. We need to remember, these tax havens aren’t all distant. We already have Ireland and we will soon have Scotland setting corporation tax rates below the UK . We need to set out our stall so that profits gained in the UK are taxed under UK law.

  6. Ravi

    I’m totally against this, and what about rental income thats exempt from NI atm..

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