Contractors will largely benefit as a result of the government’s response to the Office of Tax Simplification’s (OTS) recent report and recommendations on the competitiveness of the UK’s tax administration.
In particular, the government will ‘consider’ the merger of income tax and National Insurance Contributions (NICs), as well as agreeing to set up tax accounts and committing to provide greater tax certainty for small businesses like contractor limited companies.
“The government welcomed your review of the competitiveness of UK tax administration at Autumn Statement,” wrote Financial Secretary to the Treasury David Gauke in his letter to OTS chairman Michael Jack and tax director John Whiting. “I am pleased to report that we will accept or further consider nearly all of your recommendations.”
HMRC has conducted four consultations into the measures recommended by the OTS and as a result, Gauke’s letter confirmed that the government will accept or consider the following key recommendations that are likely to affect contractors:
- Measures to simplify corporation tax, such as aligning taxable profits with accounting profits and removing the distinction between trading income and profits and investment income and profits are being considered (Corporation Tax recommendations 1 and 2)
- Crucially, the government will consider Payroll Taxes recommendation 4: “Income tax and National Insurance should be harmonised and integrated as far as possible”
- A proposal to enable contractors to amend VAT returns online if they have made an error (OTS VAT recommendation 24) has been accepted
- The commitment that “HMRC needs to explore how to increase certainty in their tax affairs for the vast majority of small businesses, particularly around VAT” was accepted (HMRC Administration recommendation 9)
- HMRC must improve its phone service and contact centre staff training, alongside making greater use of email (HMRC Administration recommendation 9)
- Small firms, such as contractor limited companies, will have a single tax account enabling them to make regular payments to cover all taxes, and the government is considering whether HMRC should enable small businesses to make monthly tax payments throughout the tax year (HMRC Administration recommendations 10 and 37)
In all, the government gave its verdict on 48 OTS recommendations. In addition to the above, the government has also accepted a range of measures that will benefit businesses in general, such as improving guidance and streamlining processes,
A merger of income tax and NICs would make IR35 irrelevant. However, there could be one downside to the merger. Unless tax allowances and rates were also reformed, it could lead to some contractors paying more tax on their dividends.
The OTS is due to report on the findings of its most recent project into employment status early in 2015, as Gauke confirmed in the conclusion of his letter: “I look forward to meeting in the New Year to discuss your next review on employment status.”