The Treasury Minister has ruled out undertaking a full merger of income tax and National Insurance Contributions as part of a bid to simplify the personal tax system.
Only weeks ahead of the Chancellor’s autumn statement on 29 of November and the publication of draft Finance Bill clauses on 6 December, David Gauke promised to “lift the lid on tax” by transforming “the customer experience of the personal tax system”.
To this end, he published a consultation paper covering the Coalition Government’s overall personal tax strategy, options for merging NICs and income tax and a detailed timetable relating to the Real Time Information system planned for PAYE.
Launching the HMRC document entitled ‘Modernising the administration of the personal tax system: Tax Transparency for Individuals’ at a Downing Street press conference this morning, the Minister admitted that the tax system was currently difficult to understand. “It’s a black box of rates, thresholds and reliefs,” he said, adding that the Government’s overall intentions could be summarised by the phrase, ‘Know what you pay’.
But Gauke also invoked the saying of Louis XIV’s finance minister, Jean-Baptiste Colbert, who claimed that the art of taxation consisted of plucking a goose in such a way as to remove the largest amount of feathers with the least amount of hissing. “At least, the goose should be aware of how many feathers are plucked,” he said.
Moreover, it would would be new technology that provided the infrastructure for this new proposed approach, the Minister explained. In a series of illustrative examples, he showed screenshots for an online personal tax summary page that would enable both employers and taxpayers to review and amend their records.
HMRC was also hoping to release a personal tax calculator alongside next year’s Budget in order to help individuals work out what they were likely to have to pay and what their effective rate would be. A smartphone app has also been mooted, Gauke added.
Disappointment
The proposals were broadly welcomed by the advisers and lobbyists at the launch event. But in its initial review of small business taxation in March, the Office of Tax Simplification had said that integrating income tax and NICs – as tax advisers have been saying for years – was a key target of tax simplification.
Not only did the currently separate regimes complicate matters for employers and advisers, the differences between them encouraged employers and individuals to adopt avoidance strategies that would not otherwise make commercial sense, the whitepaper noted.
But Gauke – with the support of the Tax Payers’ Alliance and the Association of Chartered Certified Accountants – stopped short of endorsing a full merger. “It is right to maintain NICs separately. The contributory system is still relevant,” he said.
Sharing the platform with the Treasury secretary, Chartered Institute of Taxation and OTS policy director John Whiting expressed disappointment that the contributory principle had suddenly emerged as a barrier to such a combination. In its whitepaper, the OTS had proposed a number of steps to enable the two to move towards full merger.
“I don’t think anyone at the OTS thinks it’ll be a quick process, but if you had the one levy it would ‘solve’ IR35. If you don’t go whole hog, you’ll have to look at other devices, and those will need to be as simple as possible,” he said.
Gauke retorted that the Government was not keen to extend NICs either to those above retirement age or to people with income from investments. “You can end up with the further complication of one tax, but different rates. As always with tax, you do something in one area and a further complication can crop up in another,” he said.
The modernising personal tax discussion paper will have a 12-week consultation period, which will end on 24 February, and the Government intends to provide a progress update alongside its 2012 Budget.
Released at the same time were two other documents:
- Integrating the operation of income tax and National Insurance contributions: next steps, which summarises responses to the consultation exercise carried out over the summer. It is available on the Treasury website.
- Draft amendments and documentation explaining how the planned Real Time Information system will work with PAYE, National Insurance contributions (NICs) and the Construction Industry Scheme (CIS). The relevant documents can be found on the HMRC website.
