Tax Fairness

[uptonaccountants.com]

Afternoon all, interesting article on Accountingweb providing some figures on who pays what tax and comparing, IR35 v Ltd v Employee v Sole Traders, the tables haven't come out very well but the link is Fairness and tax:-

I recently spent some time thinking about this subject for a talk I had been asked to give. I went back over the article I wrote some months ago and played around with the numbers some more, and thought about the responses that members had made to the piece. It seemed to be very difficult to get many to say what level of taxation would be fair, but many of those commenting could comment on what they thought was unfair.

So being able to identify “fair” in relation to tax is quite difficult, but people find it easier to identify what they see as “unfair”. This brought me to thinking about fairness in taxation as a relative measure, rather than an absolute measure. Should people on similar incomes pay the same amount of tax?

I wonder whether this is the “paying your fair share” that the present Government has been very keen on – but of course then they have to answer the question as to which tax burden is the “fair” one.

Some numbers

When I wrote my original article I did produce some figures to illustrate the tax burdens, but I’d like to look at some other combinations for this article. I’ll compare the tax and NIC burden of various scenarios with the same income. The scenarios are of necessity simplistic, with the limited company scenario assuming that all profits are distributed by way of dividend, save for a small salary at the earnings threshold for NIC.

In IR35 I have had to assume that there are nil expenses, even though this is not reasonable, as the company is likely to have some admin costs at least, but it is too difficult to model this otherwise.


Income £40,000


Tax % NI Total %
Sole trader 6,705 17 2,868 9,573 24
H & W partnership 5,410 14 2,535 7,945 20
Ltd Company 7,199 18 0 7,199 18
H & W company 5,998 15 0 5,998 15
Ltd IR35 5,992 15 6,812 12,804 32
Employee 6,705 17 3,771 10,476 26


Income £60,000

Tax % NI Total %
Sole trader 13,930 23 3,338 17,268 29
H & W partnership 9,410 16 4,135 13,545 23
Ltd Company 13,534 23 0 13,534 23
H & W company 11,399 19 0 11,399 19
Ltd IR35 11,625 19 10,091 21,716 36
Employee 13,930 23 4,359 18,289 30


Income £80,000

Tax % NI Total %
Sole trader 21,930 27 3,538 25,468 32
H & W partnership 13,410 17 5,735 19,145 24
Ltd Company 21,684 27 0 21,684 27
H & W company 14,398 18 0 14,398 18
Ltd IR35 18,770 23 12,415 31,185 39
Employee 21,930 27 4,559 26,489 33



Comparisons

The sole trader and the employee bear the same amount of tax, and the NIC burden is not dissimilar, with the employee bearing around 1-2% extra total burden. However, for this additional NIC the employee receives very significant state benefits which are not available to the self employed individual.

The worker caught by IR35 bears significantly more than the employee in every scenario. This is because he is bearing the employer NIC in addition to the employee element, and this increases his overall tax and NIC burden; in these scenarios he is bearing more than double the NIC liability of any other structure.

And where a couple are both involved in a business, the benefits of using a joint structure – either a partnership or a jointly owned limited company – are clear. However, I would argue that this is a false comparison, and for a partnership making £40,000 a better comparison is two individuals each earning £20,000.

So how much is fair? And which one is not?

I suspect that it is easy to point to IR35 and say “that’s not fair” – indeed that was the trigger for my original article. Some will argue that the engager compensated for this by inflating the payments made to the contractor so that his income is higher. But that is by no means certain, and it doesn’t alter the fact that the tax system seems to discriminate against some workers and in favour of others.

So should the tax system aim to tax these businesses in the same way? Should small businesses have a tax incentive? What behaviour is to be incentivised? Employing staff, training staff, or just contribution to GDP? Small businesses may be the engine house that drives us through the current recession – they are nimble and can adapt to the conditions faster.

And what does the tax system do – or what should it do - about contract labour? Should it recognise that a skilled mobile workforce which is not based around employment is the right solution to the needs of big businesses? Certainly the contractor sector has borne the brunt of job shedding by BT and similar businesses – even many of the workers laid off at the Mini plant in Cowley were contract staff – some having held their posts for up to 8 years but were “sacked” with 10 minutes’ notice – because they were never employed.

So should tax try to be fair? And if it should, how can IR35 be sustained?

[Malvolio]

Yes - but she is not comparing like-for-like. Note my reply to that article...

"Fair" tax is an nice ideal but it cannot be defined in terms of "same income = same tax burden". This would only work if the whole remuneration package was taken into account. A contract worker on £300 a day is not on the same income as a permanent worker on £72,000 pa (£300 * 240 days) but is closer to one on £37,500. The permanent worker has paid benefits the contract one doesn't have and the employer has to carry the permanent worker's overheads while the contractor has to fund his own.

Most of us militants who rail against IR35 are not complaining about the need to pay taxes, but at the total lack of clarity over what taxes we should be paying and the uncertainties that imposes on our day-to-day work. We would not seriously object tp paying any level of tax, provided we knew in advance how much it was going to be and that all similar businesses were paying the same amount.

"Fairness" is NL-speak for social engineering. It has nothing to do with taxation!