The Office of Tax Simplification (OTS) was, of course, set up specifically to review and simplify the UK’s labyrinthine tax legislation. The OTS may well be interested in a new report from a prominent think tank, the Institute of Fiscal Studies, which has suggested one way of achieving this aim: tax all income-generating activities equally, so that contractors earning a living either through umbrella companies or limited companies should be taxed identically to all other UK earners.
One of the report’s leading contributors, the economist Sir James Mirlees, maintains that unless there are good reasons to do otherwise, all income from UK earners should be taxed on a similar basis, regardless of the individual’s employment origin.
Sir James takes issue with current practises in UK taxation, which applies different rates of tax on different incomes; he believes instead that a single rate of tax should become the standard for any individual who generates income from their work. Presently, different sources of income are subject to different rates of income tax, National Insurance contributions and income tax. Sir James’ proposals would replace these different systems of accounting with a single measure applicable to all types of income, including that generated by employees, freelancers, self-employed workers and limited company contractors alike.
Under the suggested scheme, a standard income tax schedule would be applied to all sources of income after an allowance for the regular rate of return on an individual’s savings. It remains to be seen whether the OTS will adopt the suggestions at this stage but they would undoubtedly herald a radical change in taxation if implemented.