The Office for Tax Simplification published their findings on 7 March 2016 following a detailed review of the possibility of aligning income tax and NIC with a view to making the system simpler and more modern.
The paper sets out a seven step programme to achieve this, but it comes with a health warning. Before proceeding, it will be important for consideration to be given to impacts of the alignment: there will be winners and losers.
The seven key stages are as follows:
- Move to an annual cumulative and agreed assessment period for employee NICs as happens with PAYE and income tax. This could impact the amount of NIC payable by many - either increasing or decreasing their liabilities.
- Base employer's NIC on whole payroll costs. The OTS believe that this would be easier to understand (this is potentially more achievable with the payrolling of benefits).
- More closely align the NIC position for the UK's 4.7m, and rising, self-employed with that of employees. The OTS state that this would remove complexity and could potentially deliver more benefits. For some time we have been aware that HMRC are concerned that the self-employed pay less NIC than employed individuals and in particular have focussed on highly paid partners in LLPs. However, it is equally important to consider those establishing a business for the first time or the lower paid self-employed sole traders who do not benefit from job security or guaranteed protections such as redundancy pay, sick leave etc. An increase in NIC cost for these individuals could stifle the grass roots which have helped the UK to grow out of the last recession.
- Critically review the contributory principle, but first increase understanding of what it really does - and doesn't - do. It would be helpful to raise awareness of what NIC funds - i.e. you do not need full NIC contributions to use the NHS.
- Align the definition of earnings and the reliefs available for income tax and NIC. The OTS feel that this would make it more equal for employees and reduce the administrative burden for employers.
- Bring taxable benefits in kind fully into NICs to remove the distortions in the NICs treatment of non-cash pay.
- Harmonise the rules governing the management of income tax and NIC, and their administration, including setting up a method so that any changes can operate automatically for both taxes, to make it easier for employers and HMRC to administer the system and reduce unnecessary differences.
Key issues which it will be important to consider include where the UK stands on the international stage and the impact on international business and internationally mobile employees (I hesitate to mention Brexit, but the outcome of the referendum will be important in this context too). In the view of some, the UK's system is actually more straightforward than that of many other countries which have several different types of charges on which their social security arrangements are based.
The government will also need to consider the impact on the growing self-employed sector, particularly at the more newly established, less lucrative levels which have provided bedrock on which growth in the economy has been based in recent years.
It will be interesting to see what the Budget brings next week (also look out for more changes for the self-employed in the context of IR35 and the intermediaries and agency legislation).