Although immediate reactions to the OTS review of small business taxation have been negative in some quarters of the UK’s self-employed workforce, especially in relation to IR35 legislation, the report repays a closer reading. It is far from a fudge or a missed opportunity, as some have suggested, and the recommendations have met with a cautious welcome from organisations such as the PCG.
Bearing in mind that the OTS was charged with finding “revenue neutral” solutions, it is impossible to overlook the fact that straightforward abolition of IR35 would cost the Treasury and estimated £200 million a year, the report suggests. It would also “condone the significant underpayment of tax/national insurance contributions (NICs) by some individual,” a move which the report says will be seen as “unfair” by employees.
Either of the two lead options set out in the report – suspension or reform – should be tied to a timetable for integrating income tax and NICs. Unless this structural reform occurs, the OTS insists that “the issues underlying IR35 will continue to exist, and enforcement of legislation to combat this will continue to place burdens on both tax payers and HMRC.”
Using Treasury calculations, the OTS says that aligning income tax with NICs would cost £200 million. However, it would also save HMRC £300 million a year and employers £759 million. Perverse incentives under the current system to seek spurious self-employed status amongst some individuals, who do so in largely in order to evade NICs would also be removed.
This fundamental reform, which of course is bound to take time in order to be fully tested and properly implemented, should result in much greater clarity for individuals over their tax status than exists presently.