Speaking at a Treasury select committee hearing this morning (October 20), Bill Dodwell, tax director at the OTS, said there should be more of an alignment in terms of tax burden between the self-employed and employed but admitted it would not be easy to work out the best way to achieve this.
Under current rules, the employed and self-employed pay the same rates of income tax but self-employed workers pay national insurance contributions at a lower rate.
The rate of Class 4 NICs that the self-employed pay is 9 per cent compared with the 12 per cent paid by employed individuals.
The self-employed also face no equivalent to employer NICs, which are charged at 13.8 per cent.
Mr Dodwell also mentioned that the self-employed often paid lower taxes when operating via a company.
He said: “Many freelancers provide their services via a company and work from the Institute of Fiscal Studies and others have demonstrated that people in that sort of category are able to use the company to smooth out their tax rates and essentially over time they end up with significantly lower rates than everybody else.
“There is case of evening up the burden of taxation but you’ll have to find different ways of doing it.”
Also appearing before the committee, Judith Freedman, professor of taxation law and policy at the University of Oxford, said there was no principle on which the self-employed should be taxed at a lower rate.
She said: “The ideal would be to be as neutral as possible to different forms of working as that would not distort the market and people could decide, both engagers and the engaged, how best to organise their businesses without having to take tax into account.
“This would be far better commercially and would be good for the economy.”
Although it has been argued that self-employed take on more risk than the employed, Professor Freedman argued the tax system should not be used to reflect this risk.
She said: “The tax system is a very poor system for reflecting that self-employed take on more risk because although some self employed take on risk, some do not take on any risk at all or very little amounts.
“Therefore the risk argument simply doesn't work well.”
She suggested the government could instead use targeted grants as a way of rewarding the self-employed who do take increased risk.
The government tried to raise Class 4 NICs in the 2017 Spring Budget in order to align the self-employed with employed workers.
However, this was abandoned following a backlash from the Conservative benches as it broke the party's manifesto promise.
But Derek Cribb, interim chief executive officer at the Association of Independent Professionals & the Self-Employed (IPSE), who was also at the meeting, said if the government started to make the gap smaller then it would distort the flexible workforce, which was “key to the UK getting out of the economic crisis”.
He argued that the self-employed would not be able to handle any tax rises following the Covid-19 pandemic.
Mr Cribb said: “These are people with the lowest assets and lowest ability to get through the crisis. Taxing them as they come out of the coronavirus is not the right way to go.
“Many of them have already had to shut up shop and they will not be able to survive if they have to pay more tax. The government should leave it for a few years down the line and revisit later.”
What do you think about the issues raised by this story? Email us on email@example.com to let us know.