The prime minister announced to the House of Commons during oral questions that the government ‘will not bring forward increases to NICs later in this Parliament’, although the government will bring forward further proposals once Matthew Taylor has reported on his review of self-employment. The proposal made last week – to increase the main rate of class 4 NICs from 9% to 10% in April 2018, followed by a further step up to 11% in April 2019 – has now therefore been dropped.
The reasoning for the U-turn was explained in an open letter written by the chancellor to the Treasury Committee. ‘It is very important both to me and to the prime minister that we are compliant not just with the letter, but also the spirit of the commitments that were made [not to raise income tax, national insurance or VAT],’ Hammond wrote. He had decided upon the Budget change, he added, ‘in the light of what has emerged as a clear view among colleagues and a significant section of the public’.
Roy Maugham, tax partner at UHY Hacker Young, welcomed the decision. ‘Hitting small business owners with an extra £2.1bn in tax on the eve of Brexit seemed a very strangely timed measure,’ he said. ‘The self-employed take big risks and miss out on holiday pay, sick pay and many other benefits. It is time the Treasury stopped picking on them.’
However, Jeremy Cape, partner at Squire Patton Boggs, suggested that Hammond should have stood firm. The planned NICs increase ‘was clearly a breach of the absurd Conservative manifesto pledge, even if it wasn’t a breach of the absurd tax lock legislation in the Finance Act 2015’, he said. Even so, he continued: ‘Given the antipathy between Theresa May and George Osborne, and the way in which other Osbornesque measures, such as the £5,000 tax-free dividend allowance, had been restricted in the Budget, I don’t see why Hammond could not have been more critical of Cameron and Osborne’s pledge, and explained why it was necessary to make the change.’ This would have shown ‘a move to less political, more considered tax policy making’.
As things stand, we are left with ‘a new chancellor unable to make a reasonably sensible, and largely progressive, amendment to the tax code,’ Cape said. ‘It is likely, given the cost of Brexit and the pressures on the UK economy, that the chancellor will need to raise tax at some stage in the Parliament. So where on earth does he look?’
The CIOT urged the government to change the way it makes tax and budget decisions. John Cullinane, the institute’s tax policy director, said: ‘The move to a single fiscal event is a step in the right direction, but the abandonment of the national insurance increase shows how a better, more careful approach to tax policy is in the interests of not just taxpayers but government too.
‘The imbalance between the tax burdens on employment and self-employment remain very large, mainly because of the 13.8% cost of employers’ national insurance and, for the larger employers, the 0.5% apprenticeship levy which comes in next month,’ Cullinane said. ‘We need a wide, open and public debate on the tax treatment of different kinds of employment. If significant differentiation is to remain, then this should be redesigned on a clearer basis, perhaps on the model of the statutory residence test. These questions, and where we go with employers’ national insurance, are issues we would urge the government to consider carefully. Any changes will take time to implement but we hope that the government will return to this issue when the Taylor report is published later this year.’
The prime minister announced to the House of Commons during oral questions that the government ‘will not bring forward increases to NICs later in this Parliament’, although the government will bring forward further proposals once Matthew Taylor has reported on his review of self-employment. The proposal made last week – to increase the main rate of class 4 NICs from 9% to 10% in April 2018, followed by a further step up to 11% in April 2019 – has now therefore been dropped.
The reasoning for the U-turn was explained in an open letter written by the chancellor to the Treasury Committee. ‘It is very important both to me and to the prime minister that we are compliant not just with the letter, but also the spirit of the commitments that were made [not to raise income tax, national insurance or VAT],’ Hammond wrote. He had decided upon the Budget change, he added, ‘in the light of what has emerged as a clear view among colleagues and a significant section of the public’.
Roy Maugham, tax partner at UHY Hacker Young, welcomed the decision. ‘Hitting small business owners with an extra £2.1bn in tax on the eve of Brexit seemed a very strangely timed measure,’ he said. ‘The self-employed take big risks and miss out on holiday pay, sick pay and many other benefits. It is time the Treasury stopped picking on them.’
However, Jeremy Cape, partner at Squire Patton Boggs, suggested that Hammond should have stood firm. The planned NICs increase ‘was clearly a breach of the absurd Conservative manifesto pledge, even if it wasn’t a breach of the absurd tax lock legislation in the Finance Act 2015’, he said. Even so, he continued: ‘Given the antipathy between Theresa May and George Osborne, and the way in which other Osbornesque measures, such as the £5,000 tax-free dividend allowance, had been restricted in the Budget, I don’t see why Hammond could not have been more critical of Cameron and Osborne’s pledge, and explained why it was necessary to make the change.’ This would have shown ‘a move to less political, more considered tax policy making’.
As things stand, we are left with ‘a new chancellor unable to make a reasonably sensible, and largely progressive, amendment to the tax code,’ Cape said. ‘It is likely, given the cost of Brexit and the pressures on the UK economy, that the chancellor will need to raise tax at some stage in the Parliament. So where on earth does he look?’
The CIOT urged the government to change the way it makes tax and budget decisions. John Cullinane, the institute’s tax policy director, said: ‘The move to a single fiscal event is a step in the right direction, but the abandonment of the national insurance increase shows how a better, more careful approach to tax policy is in the interests of not just taxpayers but government too.
‘The imbalance between the tax burdens on employment and self-employment remain very large, mainly because of the 13.8% cost of employers’ national insurance and, for the larger employers, the 0.5% apprenticeship levy which comes in next month,’ Cullinane said. ‘We need a wide, open and public debate on the tax treatment of different kinds of employment. If significant differentiation is to remain, then this should be redesigned on a clearer basis, perhaps on the model of the statutory residence test. These questions, and where we go with employers’ national insurance, are issues we would urge the government to consider carefully. Any changes will take time to implement but we hope that the government will return to this issue when the Taylor report is published later this year.’
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