The self-employed may have breathed a sigh of relief with the Chancellor’s U-turn on national insurance contributions (NIC), but there may still be a sting in the tail to come. It is now clear there will not be a rate increase in any of the major taxes, but the projected lost revenue over the remaining parliamentary period will need to be replaced; where will this come from?
One possible way would be to review the circumstances around how consultants, contractors, self-employed or workers provide services to companies. This would ascertain if the services are more like those expected of an employee rather than as a person in business on his or her own account.
Key to such a review is the so called 'worker' category, prevalent in the gig economy, members of which are treated as self-employed for tax purposes but may enjoy rights commonly expected by employees, such as national minimum wage and national living wage, auto-enrolment into pensions and holiday pay. These workers benefit from being taxed as self-employed, with the associated lower national insurance costs. In addition, where workers are engaged, the engager does not have to pay employer’s national insurance which is due on employees’ salaries - presenting a favourable model for workers and engagers alike.
However, change is afoot and much will depend on the findings of the Taylor review commissioned by the Prime Minister, which is looking into modern employment practices. Although it will not focus on tax directly, it is likely that it will have a major influence on how the government structures any tax and NIC changes.
Not surprisingly HMRC and the Treasury like the PAYE system for collecting tax and NIC as it is paid monthly and overall it provides a high degree of compliance, ensuring that most employees pay the vast majority of their tax within the tax year. This compliance is particularly important as it allows HMRC to administer the tax system in an efficient manner.
It is, of course, possible in the coming year that HMRC will propose a new 'worker' tax category which embraces the advantages of the PAYE system but also levels the playing field in respect of national insurance contributions. A possible model could split out the income tax and NIC responsibility, so the worker has income tax deducted under a type of PAYE system by the engager, whilst for NIC purposes the worker would pay employee’s NIC, but the engager would not have an employer’s NIC liability or would pay a reduced rate. Such a model would result in a worker earning £40,000 paying approximately £812 more NIC per annum, higher than the proposed 1 per cent increase on Class 4 NIC.
There are a variety of models that could apply but there is one thing that we can be certain about: the whole question of self-employed and worker status will be looked at closely, and the end result will almost certainly be a greater tax and NIC bill.
For more information please get in touch with Graham Farquhar, or your usual RSM contact.