TaxSep 17 2020

MPs told self-employed tax discrepancy ‘hard to justify’

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MPs told self-employed tax discrepancy ‘hard to justify’
Credit: Dominic Lipinski
ByImogen Tew

The different tax rates levied on self-employed and employed workers are “hard to justify” and need to be looked at to save “eroding public revenues”, according to tax specialists.

In a Treasury Select Committee meeting this week (September 15), John Cullinane, tax policy director at the Chartered Institute of Taxation, said it was “very hard to justify [tax] differences between self-employed, employed and incorporated workers”.

He added: “The current situation is hard to sustain as it is eroding public revenues, causing a lot of anti-avoidance legislation and [...] the whole issue is beginning to feed upon itself.

“I can’t say it will be easy but there has to be debate and the possibility of developing a roadmap with some degree of consensus that allows people to adjust and to get out of this mess.”

Mr Cullinane said the “elephant in the room” was the employers’ National Insurance rate of 13.8 per cent which was swiped from the tax system when someone was taken off payroll.

He added: “The amount of money self-employed people are able to charge in the market reflects the fact they are less heavily taxed than an employed basis.”

Charlotte Barbour, director of taxation at Institute of Chartered Accountants of Scotland, agreed. She said: “If you have similar work, there doesn’t seem to be a logical reason in terms of fairness in why those different should people pay different amounts of tax.”

The issue was raised by chancellor Rishi Sunak during the announcement of support for the self-employed at the start of the coronavirus crisis.

The government bowed to pressure and brought the self-employed into its emergency response and pledged grants to cover as much as 80 per cent of their earnings, but with the caveat that it was “now much harder to justify the inconsistent contributions between people of different employment statuses”.

Mr Sunak added: “If we all want to benefit equally from state support, we must all pay in equally in the future.”

It mirrored plans touted by former chancellor Philip Hammond to increase National Insurance levels for self-employed people, which were subsequently dropped after accusations the plan broke a manifesto pledge.

Ms Barbour told MPs this week that a lot of the “leakage” surrounding tax sat around the employment and self-employment “conundrum”.

She added: “I think we could do ourselves a huge service if we look at that. We talk about fairness and we saw the lack of fairness in that flushing through in the coronavirus because of the nature of the self-employed.”