National insurance and income tax could be merged under radical plans to simplify Britain’s tax system, according to a report commissioned by chancellor George Osborne from experts.
In its second report, the Office of Tax Simplification, which was created by the chancellor last summer, recommends the most radical shake-up of taxation since the birth of the welfare state.
“The overwhelming conclusion is that genuine and long-lasting simplification can only be brought about through major structural change to the UK tax system,” the report says.
National insurance was established to fund the state pension, and later the National Health Service, but the distinction between it and income tax has increasingly broken down over recent decades, and the OTS points out that only six state benefits now depend on a worker’s accumulated national insurance contributions.
Businesses frequently complain that administering the two parallel systems adds to the complexity of their payroll. “Our aim is to develop practical ideas that will make things easier for small businesses when it comes to their tax responsibilities,” said John Whiting, the former PricewaterhouseCoopers accountant who led the study.
A spokesman for George Osborne said he would respond formally to the OTS’s report in his budget on 23 March, but had an “instinctive sympathy” with the simplification plans.
The OTS also recommends that the government reform the controversial “IR35” tax rules. IR35 controls who must be treated as an employee of a company for tax purposes, and affects many small family firms.
There are three proposals in the report: suspend IR35 altogether, with a view to eventual abolition; leave the legislation in place but improve the way HM Revenue & Customs administers it; or introduce a new “business test,” which would radically reduce the number of taxpayers captured by the IR35 rules.
Chris Bryce, chairman of the pressure group PCG, which represents freelance contractors, said: “Should the chancellor accept the recommendation to abolish IR35 this would be a major advance towards honesty, transparency and fairness for the freelance community.”
The OTS is chaired by ex-Tory Treasury minister Michael Jack, and led by Whiting, with four advisers from accountancy firms.
Source : Guardian
