NI-income tax merger will fall short, Treasury admits

Any alignment of national insurance and income tax, as proposed to kill off IR35, will not result in a full merger of the two systems - nor will it stop NI from having its own identity, the Treasury announced.

Disappointing the Institute of Fiscal Studies, among other tax commentators, officials said that their latest conclusion on tax and NI reform “falls short”  of the “complete merger” that some groups want.

Their update came on Monday, in a Treasury paper responding to the Office of Tax Simplification’s recommendation that integrating tax and NICs should be examined as a way to make IR35 redundant.

In their paper, the officials said that, rather than replace two systems with one, the government will instead “explore whether closer operational integration…is a worthwhile goal on its own merits.”

Even “if reform is to succeed,” the “contributory principle” that underpins National Insurance will be kept in place, as will the need for it to have “an identity distinguishable from income tax.”

Moreover, change won’t be swift, as further evidence needs collating before officials can “confirm that the benefits of [operational] integration exceed the potential upheaval of getting there.”

Assuming they do, “further rounds of consultation” will take place after next year’s Budget -  often “extensive,” the officials wrote, as if to underline the “scale of this reform and its potential impacts.”

Still, the Treasury maintains that running tax and NIC along separate lines “leads to a number of anomalies that provide incentives for employers and individuals to make decisions that are wholly tax driven and would not otherwise make commercial sense.”

Although the paper contains no explicit mention of IR35, they added: “The National Insurance system needs reform to reflect changes in the labour market over the past 60 years.

“The system put in place in 1948 was designed for a labour market in which most households had only one (male) earner, most earners had only one employment, and very few worked overseas.

“The labour market has since become markedly less homogenous, with greater part-time working, more people working for several employers, more people working in both employment and self-employment, and much greater international movement.”

Cue the government’s vision – a “simpler, fairer and more efficient system that employers and individuals can understand.” So far this is taking shape around an idea to more closely align “treatment of earnings” under the systems and homogenise the assessment periods.