U.K. Treasury Needs $2.5 Billion After Employment Tax U-Turn

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By Ben Stupples

A week is a long time in politics, according to former Labour U.K. Prime Minister Harold Wilson.

Over the past 24 hours, that line may have crossed the mind of U.K. Chancellor Philip Hammond after he reversed his divisive decision from last week’s Spring Budget to raise a total of 2.1 billion pounds ($2.5 billion) in tax receipts from the U.K.’s self-employed individuals over the next five years.

In a March 15 statement to the House of Commons, the Chancellor said the U.K.'s self-employed individuals won’t face a 2 percent rise in national insurance contributions (NIC), a state benefit. He also ruled out the chance of further increases in the employment tax over the next three years.

In line with his March 8 pledge to reduce the U.K.’s debt levels through raising funds instead of excessive borrowing, Hammond added in his statement that the total cost of scrapping the rise in NIC will be funded through “measures to be announced at the Autumn Budget” later this year. This followed a letter outlining the same plans to Treasury select committee Chairman Andrew Tyrie.

“It’s not just about the money,” Alex Henderson, a London-based senior tax partner at PwC, told Bloomberg BNA in a March 15 interview on the U-turn. “It’s also about the direction of travel that it indicated” on taxing the U.K.’s self-employed individuals.

Rapid Growth

The Chancellor’s move aimed to tackle a widening tax gap from the rise of self-employed individuals in the U.K. Employees make up 85 percent of the U.K.'s workforce, but there has been rapid growth across the country in the number of self-employed individuals, accompanied by even faster growth in individuals owning and managing their own business, according to the Institute for Fiscal Studies.

Analysis of the U.K. Treasury’s official policy costings document by Bloomberg BNA reveal that Chancellor Hammond’s plan to increase national insurance contributions was the second-highest earner in projected tax receipts at the March 8 Spring Budget, set to raise 2.1 billion pounds by 2022.

2.1 Billion Pound Tax Gap

On the topic of where the chancellor will find the funds at this year’s Autumn Budget, George Bull, a London-based senior tax partner at global tax and accounting firm RSM, said Hammond could increase fuel duty, limit the tax relief that homeowners receive on their primary residence, or tackle the billions of pounds lost through tax evasion and the shadow economy.

“In a climate where tax fairness is the watchword, the Chancellor” and his advisers “have to be very careful in the way they structure future tax increases,” he told Bloomberg BNA in a March 15 email.

“If the Chancellor is serious about tax fairness and maximizing revenues, then he should resource HMRC to begin a new campaign against tax evasion, starting with an amnesty for tax evaders to encourage them to come forward and pay what’s due,” he added in a March 15 news release.

“Following the last parliament under George Osborne, the chancellor has been tightening the tax system by withdrawing or restricting relief,” added PwC’s Henderson, citing limits on the amount of interest and loss relief that companies in the U.K. can deduct from their annual tax bills. “There’s still a lot of scope in the system for more tightening, and that’s what I’d expect” at the Autumn Budget.

Political Pledges

Following the Spring Budget last week, the Conservative Party faced accusations of breaking a manifesto pledge from the 2015 general election on not raising national insurance contributions.

The U.K. Treasury defended the Chancellor’s March 8 announcement by arguing that it related to Class 4 NICs, while the Conservative Party’s 2015 manifesto pledge related only to Class 1 NICS.

In his March 15 statement, Hammond stressed his Spring Budget plans complied with his party’s 2015 manifesto pledge. “However, in light of the debate over the last few days it is clear that compliance with the ‘legislative’ test of the Manifesto commitment is not adequate,” he added.

According to the Treasury’s costings document, self-employed individuals with annual profits of 8,060 pounds or more—which make up Class 4 NICs—faced a 1 percent rise in their payments to 10 percent in April 2018, with a further rise to 11 percent the next year. Class 1, meanwhile, applies to employees earning over 155 pounds a week, and their employers automatically deduct the NICs.

Despite the increase, however, that still left self-employed individuals facing a lower rate than the total amount that companies and employees have to pay, which can reach as high as 15.8 percent.

An employee earning 32,000 pounds a year will pay a total of 6,170 pounds towards their national insurance, Hammond said March 8. A self-employed individual, however, will pay just 2,300 pounds, he added. Some state benefits, such as a state pension, depend on an individual’s NI contributions.

‘Structural Issue.’

Speaking to the House of Commons March 15 before the Chancellor, U.K. Prime Minister Theresa May said that the rising number of self-employed individuals creates a “structural issue” in the U.K.'s tax base, adding that the government will act while also ensuring “fairness” in the tax system.

In October 2016, May commissioned a review of the country’s future labor market amid the recent rise of self-employed individuals. The government will consider its approach to employment status and taxes after considering the findings of the report, due in the summer, May added March 15.

Wider Review

As part of the Spring Budget, the Chancellor said the government will consult “in the summer” this year on the differences that exist between full-time employees at companies and the self-employed.

On March 15, he added that the government will widen the consultation to “look at other areas of differences in treatment” alongside its consideration of the Taylor review on employment practices.

“Once we have completed these pieces of work, the government will set out how it intends to take forward and fund reforms in this area,” Hammond said. “Reducing the unfairness in differences in tax treatment between those who are employed and self-employed remains the right thing to do.”

“While Philip Hammond’s announcement today will no doubt attract headlines, it does not alter the underlying need for a root-and-branch review of the way in which the U.K. taxes work in the 21st Century,” Michael Lavan, a London-based U.K. employment tax director, said in a March 15 emailed statement. “The current tax system has not kept up with modern working practices.”

“It should also be noted that today’s announcement leaves the government with a 2 billion pound hole to fill over the next five years, based on the policy costings” published last week,” he added.

A spokeswoman for the Treasury declined in a March 15 email to provide additional comment on the Chancellor’s March 15 statement, his letter to Andrew Tyrie, or clarify how the government’s review of employment practices will be wider in scope than originally planned.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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