What’s fair?

An important report was published last month, which I think could have a significant effect on the tax bills of the self-employed and those operating through limited companies over the coming years.

Matthew Taylor’s Review of Modern Working Practices explored workers’ rights in the gig economy, but also looked at the way different people are taxed.

A self-employed person doing the same work as an employed person can pay a different amount of tax or National Insurance (NI) despite receiving similar benefit entitlements.

Taylor believes that treating different forms of employment more equally in the tax system would be fairer, more economically efficient and support better quality work. But what is fair?

Different people working in different ways have different lifestyles and different levels of job security and risk.

Some believe the tax and NI system should recognise this while others do not. Fairness means different things to different people (perhaps depending on how they are currently taxed).

The difference in tax and NI treatment of different forms of working was also highlighted by the Chancellor last November.

HMRC estimates that the government loses out on £5.1bn a year from the lower rates of NI paid by the self-employed. This was behind the proposed changes to self-employed NI in the March Budget.

While those proposals were subsequently dropped, the Taylor Review concludes that the underlying principles were correct and that the levels of NI contribution paid by employees and self-employed people should be moved closer.

The Review goes even further and says that an increasing number of people are providing their labour through company structures, meaning that they are likely to pay even less in tax and NICs than if they were self-employed.

While accepting that tax is not the only factor that motivates people to adopt a particular business structure, the Review is clear on the need to minimise what it sees as distortions.

Taylor acknowledges that the subject is controversial (as the reaction to the proposal to increase self-employed NI rates announced in the March Budget illustrated), but other influential voices have made the same points.

The pressure on government to more closely align tax and NI treatments is therefore considerable.

And if you think the tax and NI issue is controversial, Taylor also highlighted the tax potentially lost through payment in cash.

I do not think we have heard the last of these issues, or indeed of disagreement over what is fair.

Paul Aplin is a tax partner with A C Mole & Sons and Deputy President of the Institute of Chartered Accountants in England and Wales; you can follow him on Twitter at @PaulAplinOnTax. He and fellow tax partner Amanda Gunter can be contacted on 01823 624450.