Tax simplification for contractors? It’s not as simple as it sounds for officials stuck in a five-stage loop
Expectations among us advisers are on the ground over the government’s tax simplification pledge dating back to Spring Budget 2022, even if a charity is now pressing the issue, perhaps hoping to see something materialise at Autumn Statement 2023.
But if we didn’t have tax simplification (pledged) we might get tax complication (unfolding further), writes Graham Jenner of contractor accountancy firm Jenner & Co.
Why tax simplification matters for contracting
And this matters of course for our contractor workforce and their clients -- employers up and down the UK.
Thankfully due to the current economic climate, contractors enable organisations to flex their workforce, as demand dictates. Without that flexibility, many organisations would rather turn work away than employ additional full-time members of staff on a permanent basis in the vague hope they’ll find sufficient things for them to do. That’s not good for a business and it’s not good for the economy.
But the complexities of the tax system -- partially in the crosshairs of the government’s simplification pledge -- put many people off contracting in the first place. Tax simplification would make a huge difference.
That said, many tax simplification arguments are driven by some other agenda.
“Simplify tax – so abolish IR35” for example is, perhaps, more to do with the effect on take-home pay, than it is about true tax simplification.
The justification from government which comes back to explain much tax complexity is said to be ‘fairness.’ The thing is, officials would say, you start with a fairly simple tax rule but because of circumstances, and due to some playing the system, people end up paying less tax than they ‘should’. Then, when it becomes so commonplace that it is a significant drain on the tax collected by HMRC, the rules are ‘tightened up.’ And thus the rules become more complicated.
Worse still, additional layers of complexity then get added in, often in the name of ‘incentives’ for business to counter the aforementioned tightening up -- to take on staff, or to invest in equipment for example.
Might simplification act as a guard against complication?
So the Spring Budget tax simplification vow (made at chapter 4.92) could, if nothing else, serve as a guard against complication.
Maybe you don’t think it really matters, because Tolley’s Tax Guide 2023-24 has already become as heavy, and as dangerous to humans, as the lead piping in Cluedo?
Well, let’s consider how a gradually more complicated tax system could arise, with regard to limited company contractors.
Stage 1 (of, say, a new government’s tax policy-making)
Corporation tax rate is increased and set to 25% of the company’s income (i.e. no tax relief for costs incurred).
To counter the above stick, the carrot from the new administration is -- there’s no tax applied on the individual for money taken from the company, as that money is already taxed.
Issue: Some contractors incur more costs than others, prompting critics to say tax relief should be given on costs incurred.
Bowing to pressure, tax relief is now given for costs a company incurs.
Issue: Some companies get tax relief on costs that aren’t strictly just for business!
Responding to a cross taxman, HM Treasury says tax relief will no longer be permitted on costs that aren’t allowable, thanks to the introduction of new rules to define what is a ‘tax allowable cost’ and what isn’t.
Issue: Businesses feel nervy and unsure (because HMT moots the above rules but takes more than a year to respond to industry responses to a Call for Evidence). So businesses pull back and decline to invest in technology.
Tax incentives to encourage investment in technology get rushed out following a quick consultation.
Issue: Some companies obtain tax relief on technologies which the government claims it didn’t really have in mind when they designed the incentives.
HMRC limits tax relief on investing in technology by defining which type of ‘technological equipment’ qualifies for tax relief.
In five successive stages, and rather quickly with a government knee-jerking and trying to differentiate from its predecessor administration, the tax system becomes MASSIVIELY COMPLICATED.
It’s a five-stage messy loop many of us advisers have seen again and again. There’s probably even a stage six -- vowing to repeal the rules, and a stage seven -- reversing the vow to repeal the rules. Sound familiar?
Just as an aside, I'm not a great fan of tax incentives to encourage businesses to invest in equipment. If the business needs the equipment; they need the equipment. And they need the equipment irrespective of whether there is some tax break on it.
All the tax break really does is reduce the net cost, but often via some complex system of capital allowance. Often the tax break consists of accelerating relief that was going to be given anyway, just over a number of years.
Why not provide that boost with a voucher, instead of complicating tax rules? Something akin to the ‘Eat Out to Help Out’ scheme during Covid? Not that the scheme cooked up quickly during the pandemic didn’t have its own issues, of course.
Be under no illusion, we are where we are
In 2023 in the UK, we already have a complicated tax system.
If the government’s tax simplification pledge, reproduced below from Spring Statement 2022 delivers, what would a simpler tax system look like, if it had contractors and other enterprising-types in mind?
Here’s the simplification pledge:
The government will collaborate with businesses and representative bodies to undertake a systematic review of tax guidance and forms for small business over the next 24 months to make it easier for small businesses to interact with the tax system as they set up and grow.
The government will ensure guidance is clear, simple and easy to find, introduce step-by-step interactive guidance and modernise HMRC forms to improve the customer experience.
My tax system simplification idea
If there was real root-and-branch simplification (going beyond guidance and forms -- so if the ‘make it easier for small businesses to interact with the tax system’-bit becomes the focus), I’d suggest the following option:
Treat one-person contractor companies as ‘small’ irrespective of the level of income.
This could be introduced on the basis:
- They have no employees other than the director/shareholder.
- They are not complicated businesses.
- They have relatively low amounts of costs.
These one-person companies, for being ‘small’ could then:
- Be exempt from VAT registration.
- Be set a flat rate of corporation tax.
- Have a tax credit on the shareholder’s dividends at the same rate that corporation tax is paid on profits.
- Suffer no additional tax on dividends paid to shareholders (i.e. remove the dividend tax -- so as to achieve a big tax system simplification)
Please note, I don’t envisage any simplification of this magnitude of the tax system, and anything enacted in the foreseeable future on the back of the simplification pledge might not materialises into anything significant.
Indeed, going beyond ‘insignificant’ would take some bold decisions by a UK government.
But significant tax system simplification it isn’t impossible, just ask Estonia
Estonia, which has topped the Tax Foundation’s International Tax Competitiveness Index for the last NINE years, has an interesting tax system when it comes to the taxation of company profits and dividends to shareholders:
- Corporation tax on profits -- only paid on profits distributed i.e. as dividends.
- Income tax -- flat 20% -- and nothing payable on dividends!
In an era where our nation’s contractors are able to pick and choose where in the world they work, the tax system in the UK needs to be attractive. Yet ‘attractive’ doesn’t necessarily mean at low rates but rather, that the business-owner knows where they stand. If at least that stronger sense of certainty results from the promise of better HMRC forms and guidance, perhaps we ought to consider that victory enough.