Originally published in the Daily Telegraph - 09/03/2017 (https://goo.gl/59FQMw)
The government has made clear its desire to make the UK "the best place to start and grow a business", a sentiment that I support and one that is increasingly more important as we embark upon our new, liberated journey outside of the EU. The National Insurance tax raid announced in the budget seems to fly in the face of that commitment.
In this new world we need entrepreneurs, we need small businesses to create and replace the supply chains currently based in Europe. This will reduce tariff exposure for large companies based in the UK currently importing production parts from Europe. We need small businesses to create products which substitute those we currently import – we need them to make Britain Great.
Small businesses have had to deal with a large number of changes with far less resource than their bigger brothers. They have had to deal with the doubling of insurance premium tax, automatic pension enrolment, the extra cost of the living wage, the infrastructure levy, the revaluation of business rates and the “making tax digital” plan.
While the delay in implementation in the electronic quarterly tax returns announced in the budget are welcome for those businesses under the VAT threshold, it is still too little too late and shows a complete lack of understanding of the underlying problem – resource.
The cap on business rates for small businesses if they just fall outside the small business rate relief scheme this time, is welcome as is the £1,000 discount for pubs alongside the £300m pot for local authorities to offer discretionary relief.
But this is an outdated, unfair, totally opaque tax which needs replacing with a new business tax not based on property alone to provide a fair playing field between online and offline retail. A review is promised – as it has been twice before. This is a problem that must be fixed!
But the changes to National Insurance defy belief! What did the chancellor think he was doing? Increasing the rate of "Class 4" contribution from 9 per cent to 11 per cent over two years! At least he kept his word and abolished "Class 2" contributions which was unfair, not well understood and not related to income or profit. But while Class 4 contributions are profit related and therefore “fairer”, this was I suspect not the reason for the change but a post-decision marketing strap line. It has all the hallmarks of the “pasty tax” own goal.
This change had nothing to do I believe with the fact that some of the employed benefits, such as a right to a pension, now apply equally to the self-employed therefore they should pay equal Class 4 contributions. These small businesses work long hours at well below the living wage taking huge risks and without sick pay and certainly little if any holiday!
The target I suspect was the emerging increase in tax avoidance by large businesses paying contractors as self-employed business owners rather than employees. The benefit to the big company is it not only avoids employment legislation but it also avoids paying employer national insurance at 13.8 per cent. The self-employed so called contractor only has to pay the employee contribution, now 9 per cent. The increase in the employee Class 4 contribution to 11 per cent was intended to discourage this practice.
A further target I suspect was large multinational partnerships, the LLPs that have the benefit of limited liability without the burden of incorporation and corporation tax. Instead they pay income tax and Class 4 National Insurance on their share of partnership profits. They too avoid employer NICs.
The 2014 Finance Bill and subsequent changes to NICs rules tried but failed to deal with a very complicated problem. But this flat across the board increase in Class 4 rates will cause too much collateral damage to the lifeblood of our enterprising nation, our small businesses, which are for the most part self-employed sole traders – 76 per cent of them. If Mr Hammond wants to find his £2bn he needs to focus his tax raid on these larger businesses not the micro self-employed entrepreneur.
The fundamental problem we have is an increasingly complex tax system which too often drives business structure decisions. A business needs to have the right structure for what it wants to do. Tax is driving behaviour, particularly that of larger companies which can afford to take advice. Small businesses by contrast just get left to deal with the unintended consequences. The Office of Tax Simplification needs to look at this now so the Cornish pasty doesn’t turn into a custard pie!