Tax experts vindicate Rishi Sunak for threatening sole-person businesses

Rishi Sunak has been backed by experts giving evidence to the Treasury Select Committee who say the tax differential enjoyed by the self-employed – including PSCs – looks off.

In the committee’s latest ‘tax after coronavirus’ session, two of the three tax experts endorsed the chancellor’s view that regardless of status, ‘people must pay in equally in the future.’

Reminded of this warning from Mr Sunak back in March (he also said ‘inconsistent tax contributions were now harder to justify’), Charlotte Barbour of ICAS as good as repeated it.

'There doesn't seem to be a logical reason'

“It is very difficult to justify different tax rates for what people call the three-person problem,” began Ms Barbour, a director at the Institute of Chartered Accountants in Scotland.

“If you have similar work, whether you are employed, self-employed or through a company, there does not seem to be a logical reason in terms of fairness as to why those different people should pay different amounts of tax.”

Ominously for PSCs, given that they received little under the state’s covid-19 income support schemes just as the Autumn Budget still looms large, John Cullinane of the CIOT agreed.

'Very hard to justify'

“It is very hard to justify these differences,” began Mr Cullinane, a director at the Chartered Institute of Taxation.

“If you had a blank sheet of paper, you would probably design something where either they were somehow paying the same tax or, even if there were different taxes for different legal situations, the overall balance was better.”

Reassuringly for limited companies fearful Mr Sunak is considering a single, big hike in their liabilities (such as on dividends), all the experts said a flick-switch solution was not feasible.

'Too complicated'

Reflecting after the session, which was held online, status adviser Rebecca Seely Harris said:

“The general consensus from the [expert] panel was that it is a subject that needs to be addressed, but that it was too complicated to be a simple tax rate rise.”

“[Nonetheless,] it is likely that the chancellor will raise National Insurance contributions for the self-employed at some point, but hopefully now is not the time.”

'IR35 causing problems and hardship'

In line with her analysis, the CIOT’s Mr Cullinane described employer NI – standing at a significant 13.8% -- as “the elephant in the room”.

“[But this] is being taken out of the system by having somebody move off payroll, whether they are incorporated or not.”

He added: “The current situation is very hard to sustain. It is eroding public revenues. It is causing lots of anti-avoidance legislation to have to come in with IR35 and so on. That, in turn, is causing problems and hardship. The whole issue is beginning to feed upon itself.”

'Missing the elephant in the room'

As to solutions, the panel’s third expert, Anita Monteith of the Institute of Chartered Accountants in England and Wales, said there had actually been an attempt to find some.

But she said it was thwarted by the government. “Can I remind everybody that we had some really good work done by Matthew Taylor a few years ago?

“He was spiked before he even got started because he was told specifically not to look at tax.”

She also recalled: “I think all of us here went in to see him, one after the other, and said, ‘But you must look at tax; otherwise you are missing the elephant in the room.’”

'Massively painful'

Elsewhere in her evidence, the representative of the ICAEW endorsed a more “joined-up” process, which HMRC and Companies House “were drifting” to “seven or eight years ago”.

More radicals steps, such as tax increase for PSCs or other individuals who work for themselves, would be “massively painful”, cautioned the CIOT’s Mr Cullinane.

Interestingly, he confirmed that ahead of the potential November Budget, the OTS is considering “a number of” alternatives to the limited company structure.

'People complaining'

But he suggested that more emotive considerations might need looking at, instead of just dry entity-type proposals from the tax simplification unit, as he submitted:

“We have seen from the people complaining that they have been shut out of the coronavirus help, it is often how they see themselves as being still self-employed even though they have a company that protects their liability. Maybe we should respond to that kind of desire.”  

At ReLegal Consulting, where its boss Ms Seeley Harris formerly advised the Office of Tax Simplification, the sense is that things could go either way for sole-person business owners.

'The Budget's timing is up to the chancellor'

“It was…said [by the panel] that there needs to be a conversation. But not just about tax, they [the government] need to look at the benefits that people get as a result of the tax they pay.

“[What with] the OTS also saying that they will be looking again at taxing the self-employed and PSCs, things can only get... ,” she wrote in a post, leaving room for others to insert 'better' or 'worse.'

Asked about the on-off Autumn Budget 2020 and potential impacts on tax collection if it is delayed until 2021, a spokesman for HMRC declined to be drawn, other than saying that whether to go ahead with a Budget this year was “obviously a decision for the chancellor to make.”