Autumn statement submission: David Kirk calls for the abolition of employers’ NI.

The Treasury has asked for original and innovative ideas to be included in the Autumn Statement (see https://www.gov.uk/government/news/autumn-statement-2014-have-your-say). David Kirk submitted the following.

I understand that the Treasury is seeking original and innovative ideas for the Government’s Autumn Statement. As to my credentials for this proposal, I am a Chartered Accountant and Chartered Tax Adviser who specialises in payroll taxes (PAYE and NI) and employment status.

I should like to propose the abolition of Employer’s National Insurance, and the replacement of the lost income by a higher rate of Corporation Tax. I do not know how much it would be necessary to put the Corporation Tax rate up by, as I do not have access to the figures, but my guess would be about 3%.

Employer’s NI is a tax on jobs, and this would give a real incentive to employers to hire more people. It also distorts the tax system, by encouraging people to reclassify themselves as self-employed (both genuinely where it makes no commercial sense to do so, and falsely), or to set up companies and either avoid or evade the intermediaries provisions known as IR35 – which are far more about NI than they are about Income Tax. Corporation Tax by contrast does not distort the tax system, and has the added advantage of being paid by businesses that have made a profit, and so (presumably) are in a position to pay it.

The distortions caused by Employers’ NI are huge. As an example (these are 2013-14’s figures – I have not reworked them but this year’s will not be far different) an employed person earning £25,000 a year will pay £5,182 in income tax and National Insurance, leaving him with £19,818 to take home. His employer will also have to pay £2,388 in National Insurance, meaning that the total cost of employing this person will be £27,388. If this company were to spend £27,388 to procure an independent contractor to do the same work, that contractor would not only receive more but would pay less in tax. He would be in pocket to the tune of £21,891. If the contractor were then to incorporate his business, he could get out of National Insurance altogether and end up with £23,450.

With differences like this, it is not surprising that there has been a rush to self-employment and incorporation over recent decades. There are benefits for employers too: not only can they lower the rates and recoup some of the difference for themselves; there are also a great many employees’ rights that independent contractors do not have and that they, the employers, therefore cannot get sued for. Also, the fact that the self-employed are responsible for their own tax attracts to this status the kind of disreputable people who have no intention of paying their fair share. Nor is it surprising that some of this purported self-employment is bogus. The combination of economic and fiscal pressure for self-employment and a very hazy grey area makes this inevitable. The courts are always on the look-out for a sham, but it has to be said that they rarely find one.

Governments have gone to some lengths to combat this, with the agency rules (1977), IR35 itself (2000), the managed service company rules (2007), and now the onshore and offshore intermediaries rules. It has to be said that not all of these efforts have been notably successful. Sometimes other tax changes inadvertently make incorporation of one-man bands more attractive, such as the abolition of Advanced Corporation Tax in 1999.

Corporation Tax, by contrast, does not distort the tax system, particularly when (as now) it is levied at the same rate as basic rate Income Tax. A move from one to the other would take away

considerable incentives to play the system. It could also simplify Government finances quite a bit.

How then could the revenue from employer’s NI be replaced? From what I can see Employer’s NI is paid principally by the following types of employer:

Central government

– this is effectively circular money: the various departments and agencies would simply get their allocations cut by the amount of NI they would be saving.

Local government

– as local government is largely financed by central government the same could apply here: it could get its grants cut by a corresponding amount;

Charities

– much charity work is also financed by government (central and local, but I suspect largely central), and grants could be cut accordingly. To the extent that it is financed by outside sources this would represent increased income for the charities, which could be defended on policy grounds.

Companies –

these would pay a higher rate of Corporation Tax to compensate. I would suggest that the aim should be to present this change as revenue-neutral.

Partnerships and LLP’s –

these would gain from this measure. However partners in the larger partnerships (where most of the NI would come from) will pay higher rate or additional rate tax, and so a noticeable proportion of the money saved would come back via tax on increased profits: this could also be defended on policy grounds as these partnerships will anyway be paying higher rates of tax on their profits than companies who may be their direct competitors.

Individuals –

these will also gain – however most of these will be in business and so the same considerations will apply as with partnerships. At the micro level the Employment Allowance has already taken many businesses out of Employers’ NI.

One other point to note is that employers’ NI contributions are not allocated to the account of any individual, unlike the corresponding employees’, so there are no considerations of people losing benefits as a result. Also, the absence of Employer’s NI will make it easier to align Employees’ NI with PAYE, which I understand is a policy objective of the Government.

I do understand that the Government places much store on the headline rate of Corporation Tax and will be wary of seeing this fall below 20% when so much effort has been made to get it down to that level. In my view the possibility of being able to advertise to inward investors that there are ‘no payroll taxes for employers here’ would far outweigh any damage that might be done by seeing the headline rate of Corporation Tax rise.

Back in the 1980’s Nigel Lawson aimed to abolish (and generally succeeded in abolishing) a tax in each budget. This proposal would enable the Chancellor to pick up that mantle