Why tax reform must be top of the agenda for the new government

Stephen Herring
Charities Protest With Tax Haven Paradise In Trafalgar Square
Source: Getty

When a politician tells you that they have a great plan to “lock” specific bits of tax or spending, watch out – it’s probably a bad idea.

It’s possible to understand why a pledge to protect pensioners might be politically successfully, but the “triple-lock” – which guarantees to increase the state pension every year by the higher of inflation, average earnings or a minimum of 2.5 per cent – has seen pensioner income rise faster than working families in recent years. It couldn’t survive in the long term, and the Tories were right to downgrade to a “double lock” in their manifesto this week.

Similarly, when the Conservatives pledged in 2015 not to raise income tax, VAT or national insurance contributions (NICs), it probably seemed like a clear vote winner, emphasising their claims to be a low tax party. It came back to bite them, however, when the chancellor was forced to U-turn on a NICs rise for the self-employed in his recent Budget.

So it was also perhaps not that surprising that a promise to freeze NICs didn’t make it into the manifesto. Business leaders clearly do not favour tax rises, but national insurance is one area where reform – if conducted in a balanced way – would be supported by most companies.

We are living in a time of major change to the world of work. It’s become common to talk of a “fourth industrial revolution”, with new technologies, digital platforms and automation reshaping production and consumption. One of the most visible elements of this is the so-called gig economy. The IoD is an unapologetic champion of innovation, but it’s common for new industries to have teething problems, and gig working is throwing up questions for both employment law and the tax systems.

The Taylor Review, launched in October 2016 and due to report next month, was established to look at how employment practices need to change in order to keep pace with modern business models.

Tax was not meant to be the main focus of the review, but it has become clear that there are implications for the Exchequer, not least when it comes to national insurance contributions. It would have made more sense, in retrospect, if the chancellor had waited for Matthew Taylor’s findings before including any related changes to national insurance contributions in his main Budget in November.

Although the U-turn after the chancellor’s March Budget, and the General Election next month, have added further hurdles to reforming NICs to create a more level playing for different business structures, it is to be hoped that these are not insurmountable hurdles. Reform is overdue, and the need for it is accelerating as the flexible economy expands.

Currently, the self-employed pay a considerably lower rate, and there are concerns about the long-term strength of public finances, if changes in the economy mean more and more people choose self-employment.

After the Budget, we asked IoD members how the burden of NI should be split between employees (and their employers) and the self-employed. Nearly six in 10 said that the two groups should be on a level playing field. This was with the important caveat that the overall amount raised should not increase – any rise for the self-employed should be matched by decreases for direct employment.

Any changes proposed will require both genuine consultation beforehand and sufficient transitional provisions upon their enactment, and should reflect the less generous benefits made available to the self-employed under the state benefits system.

Many will tell you this is a single issue Election, the issue being Brexit. This is not, and should not be, the case. There are a host of issues that business leaders are concerned about, from skills to infrastructure. And while the urgency to resolve these may be exacerbated by Brexit, these areas all require proper attention and debate.

Tax, including NICs, is among their many concerns. Whoever wins the Election should bite the bullet and launch a wholesale review of NICs – but within the constraint that the overall burden is not increased by the final proposals, so that it is fit not just for the short-term pressures of an election campaign, but also for the long-term direction of the economy.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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