Some limited company contractors have been hoping that the government’s proposal to align income tax and National Insurance would be the final nail in the coffin for IR35.
The Office of Tax Simplification recommended that the government examine the idea, but the Treasury has now announced that the two systems will not merge completely as National Insurance needs to retain its own identity.
Treasury officials said that instead of replacing two systems with one, the coalition will examine whether the systems can work more closely together. National Insurance has to remain distinguishable from income tax because of its contributory nature, and any reforms must keep that identity in place.
Before any integration plans are put into place, the Treasury needs to confirm that the advantages exceed the upheaval that will be caused by altering the current systems. If after examining the evidence, the government believes it is worth pursuing the proposal, there will be further extensive consultations after the Budget next year.
However, the Treasury does admit that running NICs and tax as separate entities provides employers to make tax driven decisions that otherwise do not make commercial sense.
The latest Treasury paper does not mention IR35 explicitly, but does say the NI system needs to be reformed to fit the labour market changes that have taken place in the last 60 years. The UK is still operating from a model that was implemented in the 1940s when only one member of a household worked, the majority of workers had only one job and hardly anybody worked overseas.
We now have a situation where some people have several part-time jobs, more people are self-employed and going abroad to work is not unusual.
The government’s vision is for an efficient, fair and simple system that everyone can understand. The evidence so far points to aligning the treatment of earnings more closely rather than fully merging income tax and NI.
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Image: Merge by wFourier
