Market leading insight for tax experts
View online issue

Taxing the labour market

printer Mail
Speed read

Tinkering with rates, as the chancellor recently attempted to do with class 4 NICs, is poor policy and little more than papering over the cracks. Only by confronting more fundamental questions – of how we allocate risk and what types of behaviour we want to encourage – can government meaningfully respond to changes in the world of work.

You’re Philip Hammond. It’s a month before Budget day 2017. ‘Our times are plenty interesting enough,’ you ponder to yourself. ‘A nice boring Budget. That’s the way to go.’

‘There’s been a huge rise in self-employment. Technological changes have exposed the huge difference in the NICs cost of putting £100 into the hands of a self-employed worker compared with an employed one. Up to £16.80.

‘And I shouldn’t forget that enormous decline in the receipts we expected from NICs and income tax. They fell by £90bn over the forecast period in the nine months between last year’s Budget and Autumn Statement.

‘But let’s not frighten the horses. A modest rise in self-employed NICs – staggered and only coming into effect in the future. That’ll cheer up the tax geeks – and keep the Treasury happy. There’ll be a bit of moaning – whenever was there not? – but nothing I can’t handle.’

But time makes fools of us all. So where do we go now? What happens when a government, even one virtually guaranteed a whole extra term in office, can’t raise tax rates? Do future chancellors just strike through that bit of the tax map marked personal income taxes? Here be dragons?

In truth, raising the rate of self-employed NICs was poor policy. Looked at as a revenue raising measure, it was timid and – at least by direct tax standards – regressive. Looked as an anti-avoidance measure, it was poorly targeted and ineffective. And, of course, in political terms, it smashed the manifesto tax lock.

But, beyond all of this, it really just papered over the cracks of some bigger problems still.

The real issues here are definitional ones. Just proceed for the sake of argument from the assumption – heavily embedded in our tax system – that we do wish to use it to privilege self-employment. The inevitable next question is, why? What is the type of activity that we want to benefit? That question has not, to the best of my knowledge, been the subject of proper consideration in recent times.

And, whatever the answer, it is unlikely to be provided by a common law test of ‘employment’ that can be traced back to (at least) the National Insurance Act 1911. It would be remarkable if the answer to the question posed by that Act in 1911 – ‘Who should and who shouldn’t benefit from a statutory health insurance scheme?’ – was substantively identical to the answer to the question in 2017 – ‘Which modes of working should be privileged by the tax system?’

Without knowing the answer, we can’t really assess whether the privilege – a lower rate of tax than is charged on employment income – is merited at all. And if it is, whether the privilege is set too low or too high.

Hammond’s attempt to raise NICs did nothing to answer these questions. It was a sticking plaster applied to a bleeding wound by a blind physician.

Nor can these questions be answered in isolation from employment law. To seek to fix the tax system whilst ignoring the dis/incentives created by employment law is to try to walk to a destination using only one leg.

You might think of the test of employment this way. Fundamentally, it is about allocating responsibility for providing an individual with a safety net between three protagonists: the individual, the state, and the engager (to adopt a neutral nomenclature) who uses the individual’s labour. The consequence of the status of employment is to allocate a greater proportion of that responsibility to the engager. The consequence of self-employment is to allocate more of that burden to the individual and, in extremis, the state.

Again, the answer to the question ‘How in today’s fast changing employment market should we choose to allocate between the three?’ is unlikely to be found in a distinction drawn in 1911 for a completely different purpose.

The world of work has changed and continues to change, and the rate at which it changes is likely to increase. These questions of how we allocate risk and what types of behaviour we want to encourage are fundamental to how we, as a society, respond to these changes. It is by answering them, and trimming our answers as the world and our priorities alter, that government acquires the ability to shape changes in ways that benefit society.

A common law test delivers the answer of habit. It is thoughtless – in the sense of it signalling a government that has chosen not to wrestle with these questions. It evidences a government that has chosen to remove its hands from, rather than wield, the key policy levers that shape the world of work.

And it is likely to, and does, deliver outcomes that are inimical to what are likely to be our considered objectives. As things stand, we use our tax system to incentivise engagers not to provide a safety net. This – one hardly need say – makes little sense. Indeed, you might think the incentive should be exactly the other way.

Tinkering with rates does nothing to address these fundamental questions. It is only by confronting them – through statutory tests (in all likelihood different statutory tests) for employment and tax purposes – that government will acquire the ability meaningfully to respond to changes in the world of work. This exercise need not be political in the sense that raising rates is. It is work that the chancellor could – and should – still do.

Issue: 1349
Categories: In brief