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Budget 2017 - Plugging the tax gap

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15 March 2017

On the day it seemed to be what Philip Hammond had promised; that is, a boring budget. One of the tinkering changes, relatively small in its economic impact, was the increase in National Insurance contributions from the self-employed. The ensuing outcry has been deafening.

The political reason, of course, is that it is a tax rise and therefore a breach of the Government’s manifesto pledge not to raise taxes in the life of this parliament. This on its own, however, does not explain the strength of feeling against this measure. There is talk of it being an attack on our entrepreneurial culture and the injustice of increasing the tax burden of the self-employed who do not enjoy the same state benefits as employees.

It is true that the self-employed pay less NI than those who are employed. According to HMRC, the gap was £1,240 per self- employed person. The changes announced last week will cost the higher earning, self-employed £240 per year.

There has been a significant surge in the number of self-employed in the UK over the last few years, not experienced by any of the other main EU countries. From a low point of 3.25 million in 2001 there are now 4.8 million self-employed, accounting for one in seven workers in Britain.

It is not just the tax advantages that explain this trend. Studies have shown that people become self-employed for a wide variety of reasons including increased flexibility and variety, changing work patterns and technology. Employers often prefer independent contractors. It helps them cope with peaks and troughs in their businesses and saves them employers NI, holiday and sick pay and pension payments.

Some see the trend towards self-employment as a boost for the economy. It has certainly helped keep the levels of unemployment down and probably contributed to the UK’s relatively fast recovery from the last recession. Others, however, feel that it has had an adverse effect on productivity as companies using self-employed contractors invest less in technology and staff training.

In this context it is easier to see the reasons for the Government wanting to narrow the tax gap between the employed and self-employed. There has already been a substantial leakage of tax due to the shift to self-employment and it looks set to get worse if the trend continues. A little finger was put in the dam. It has been temporarily withdrawn by Mrs May until the autumn, but in the light of the above, it will probably then become a permanent plug.

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