‘Unacceptable’ if Osborne ducks IR35

Merging income tax and National Insurance – a move freshly recommended to make IR35 obsolete – is expected to be announced by George Osborne this week in the 2011 Budget.

Disclosures from within the Treasury state that the chancellor will show a “clear intention” to align the two tax systems when he delivers his first March Budget on Wednesday.   

Seen by the Sunday Times, the disclosures suggest that the merger will be presented as a way to make life less burdensome for firms, and a way to make tax payments more transparent.

But as recommended by the Office of Tax Simplification, joining NI and income tax will also clear up anomalies and abuses of the tax system, which the IR35 rules were meant to address.

“The chancellor must be decisive on the issue of IR35,” said Andrew Hubbard, president of the Chartered Institute of Taxation, and tax director at accountancy firm RSM Tenon.

“It is important that he indicates whether IR35 will be suspended or if improvements will be made to the way in which it is administered, whilst the idea of merging the PAYE and NIC systems is considered in the long term.”

Small business group the Forum of Private Business is one of the longest-standing advocates of merging income tax and NI, and welcomes its status as the primary recommendation from the OTS.

Head of Campaigns Jane Bennett said: “We have been calling for the alignment of income tax and National Insurance for a number of years. Most business owners find the continuing distinction between the two baffling”.

She believes that unless the merger, and the OTS’s other ideas, results in the chancellor taking action “and soon,” businesses will come to see the office’s review as nothing more than a “PR exercise.” 

However one tax advisor to IT contractors is less convinced that the alignment of NI and income tax will represent a silver bullet, quite apart from the political and practical difficulties of such a move.

Accountancy firm Brookson explained: “The OTS [has proposed] the integration of income tax and national insurance as a solution to the problems created in distinguishing between employed and self-employed individuals.  

“This approach will only deliver the simplification of tax rules, it has set out to achieve, if self-employed and employed individuals are taxed at the same level.”  

Managing director Martin Hesketh dislikes this envisioned ‘one—size-fits-all’ tax treatment:

“Self-employed individuals and small businesses should be nurtured in order to provide a distinct competitive edge for the UK‘s economy [and] the tax system has a vital role in this nurturing process”.

He added :“We are very concerned…that the drive for simplification may result in a tax system that is easy to understand and operate, but also one that fundamentally undermines key elements of the competitiveness of the UK economy.”

These issues may explain why RSM Tenon says that, more than just a merger of NI and income tax, the chancellor’s announcements on Wednesday will “more than likely” include a complete review of how small businesses are taxed.

Last week, a senior source at the OTS told CUK that on Budget day the chancellor will “probably” ask its review team to carry out further work on small business taxation, which would include IR35.

That work would be in addition to “bottoming out” the existing IR35 recommendations, and would be carried out between now and the year-end – the deadline suggested by the OTS for when a timetable for merging tax and NI should be committed to.

However any putting off issues relating to small business taxation for further review won’t just disappoint owner-managers looking for more certainty from the tax system.

Pointing to Wednesday as an opportunity for the chancellor to take some definitive action on IR35, Mr Hubbard, at the CIOT, said: “To do nothing is simply not acceptable.”

Monday 21st Mar 2011