The right amount of tax

I have just been looking at two National Insurance issues in the press.

In one case, a man was claiming a higher national insurance pension on the grounds that the government should have spotted the NIC saving scheme his employer was using and stopped it. Because the government had failed in its duty it ought to pay him more pension without being able to claim the back NIC from him (as the saving scheme only benefitted him in recent years because his employer paid the same amount of NIC either way). The tribunal dismissed his case although it did comment that there seemed to be some failing in the government system back in the early 1980s.

The other case is the government's consultation document on workers in the contruction industry. Not content with the CIS scheme (which means that smaller contractors have tax deducted at source from their income from main contractors) they want to go a stage further and recategorise large numbers of smaller contractors as employees for tax and NIC purposes.

What is the benefit for the government? There are differences in the rules for claiming tax relief on expenses, so there may be a higher tax take but the big difference is the NICs (the self-employed pay at most 8% whereas the take from employers and employees is over 20%). One commentator has suggested that if the tax rules are changed so that there is little difference in the overall tax take, workers will worry less about whether they are employed or self-employed. I think this misses the point.

The difference between employed and self-employed workers is in their rights. If you are an employee, you have employment rights and special tribunals to make sure you get them. As an employee you are entitled to various benefits (unemployment benefits and statutory sick pay and benefits when a child is on its way). As a self-employed worker your only rights are under the deal (contract) you make with the employer and if you are off work for any reason, the only benefit you might receive is a tax credit.

By all means change the rules, but please make sure that the change is proportionate - in other words, if you are going to increase the "tax" take (which is going to be mostly NICs), then expect a lot of benefit claims from construction workers and make sure that they are given employment rights too.

But of course expecting employment rights is probably too much - after all when IR35 was introduced back in 1999, the original intention was to tax the engaging company - and the rules changed after complaints from the bigger business lobby, so that it was the subcontractor who was stung with the new tax. And what was the new tax? Taxing the subcontractor as if he was an employee without giving him any employment rights against the engaging company.

We shouldn't let them get away with it

The government introduced a number of interesting changes to the tax law recently. A new tax rate for those earning a lot (over £100,000) by reducing their personal allowance and taxing them at 50% from next year (April 2010).

There is also a reduction in tax relief on pension contributions for those earning over £150,000. They will only be entitled to basic rate rate relief on contributions over £20,000 from April 2011.

Oh, but that's not fair on people who have set up regular pension contributions in the expectation of the higher rate relief, so there are complicated provisions to give these high earners their higher rate relief. The provisions are complicated because it is not always obvious that pension contributions are regular.

And then there are those naughty people who see a tax relief and try and get it even when it is not due. So we have even more complicated rules to stop these naughty people getting relief they are not entitled to.

And now we have even more rules published a few weeks ago so that those even naughtier people who look at the rules and work out what they mean and how to make best use of them. They now have to tell the Revenue they have found a "scheme" which gives people tax relief which they might not otherwise have got.

Sometimes you wonder - why is it all so complicated? Why do we use so many words which then have to be read in great detail and probably argued about through the courts in due course? If the government need to raise more tax, why don't they simply put up the tax rate or introduce a new higher tax rate instead of introducing a whole raft of legislation which only makes life more complicated for everyone. But no, taxes have to be fair, so they are complicated in their approach. (Oh and national insurance is going up but that isn't a tax and it isn't happening till 2011 so we don't need to worry about that).

We shouldn't let them get away with it - that seems to be the motto of the government - here have a tax relief, but don't you dare try and use it because that is unacceptable tax avoidance!