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!