Self-employed tax u-turn shows why Budget ‘rabbits’ are a bad idea - CIOT

The Government’s u-turn over the National Insurance increase for the self-employed shows what can happen when Chancellors pull ‘rabbits’ out of the hat on Budget day without consulting or preparing the ground in advance, the Chartered Institute of Taxation (CIOT) has warned.

In a letter to MPs, Chancellor Philip Hammond said yesterday that there would be no increase to National Insurance contributions for the self-employed in the Class 4 band ‘in this parliament’, despite announcing it in last week’s Budget.

John Cullinane, Tax Policy Director at CIOT, said: “This is yet another example of a Budget ‘rabbit’ that has come back to bite the Chancellor. Philip Hammond is just the latest chancellor to discover the perils of announcing tax changes without consulting or preparing the ground adequately in advance.”

The CIOT, Institute for Fiscal Studies (IFS) and Institute for Government (IfG) published a report (‘Better Budgets’) earlier this year which highlighted the problem of inadequate consultation and a lack of a strategic approach to tax policy from successive UK governments.

Mr Cullinane added: “We urge the Government to change the way it makes tax and budget decisions to reduce taxpayer confusion, cut down costly errors and avoid embarrassing U-turns like today’s. The move to a single fiscal event is a step in the right direction but today’s abandonment of the National Insurance increase shows how a better, more careful approach to tax policy is in the interests of not just taxpayers but government too.

“Reducing the volume of tax changes, as the Chancellor did last week, should help the Government to consult more effectively, early and widely enough on the measures they bring forward in future. The Treasury needs a more robust policy making process involving more challenge – internal and external – before measures are decided upon.

“The imbalance between the tax burdens on employment and self-employment remain very large, mainly because of the 13.8 per cent cost of employers’ national insurance and, for the larger employers, 0.5 per cent Apprenticeship Levy which comes in next month. We need a wide, open and public debate on the tax treatment of different kinds of employment. If significant differentiation is to remain then this should be redesigned on a clearer basis, perhaps on the model of the statutory residence test. These questions, and where we go with employers’ national insurance, are ones we would urge the Government to consider carefully. Any changes will take time to implement but we hope that the Government will return to this issue when the Taylor report is published later this year.”

Also reacting to the news of the Chancellor’s climb-down, Susie Simpson, partner and head of private business for PwC in Scotland, said: “There has been a rise of around 11 per cent in Scottish self-employment since 2008, so this news will be welcomed by the one-in-nine Scots who would potentialy have been impacted by the Chancellor’s Budget announcement. Many of these would have found themselves thousands of pounds worse off as a result of the proposed changes.”

“This is especially good news for some sectors in Scotland, like technology, catering​,​ media and life sciences ​- really any sector with high growth start-ups and scale-ups​ - ​and may also encourage people, who in the last week paused plans ​ for becoming self-employed, to go ahead. Those in areas like Dundee and Edinburgh which have a high-number of start-ups and scale-ups will be especially relieved.

“What we need to see now is greater clarity from the UK Government ​and The Treasury around definitions of employment - for both businesses and individuals - as well as greater debate and advance notice for changes. There will also be a lot of expectation around the Taylor Report, expected in the summer, and the Autumn Statement.”