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Mirrlees Review of UK tax - how might IT contractors be affected?
Posted Nov 18, 2010
The Mirrlees Review of the UK tax system, published by the Institute of Fiscal Studies, has recommended some radical changes to the way individuals and companies are taxed.
In line with the Coalition's stated objective to simplify the tax system, the study criticises the 'bizarre' new marginal rate on earnings over £100,000, and suggests that income tax and National Insurance should be merged.
Most significantly for contractors, the report proposes that tax treatment of employment, self-employment and corporate-source income should be aligned.
Key Principles
The key principles that underlie the proposals are that the tax system should:
- be designed as a whole, in conjunction with the benefits system. The system as a whole needs to be green and to be progressive. But not every tax needs to be green or progressive. Indeed, not all should be. The way taxes (and the benefit system) fit together matters very much.
- seek neutrality. Tax systems that distort people's behaviour by treating similar activities differently without very good reason - as the UK system currently does - create inefficiency, complexity and opportunities for avoidance. Exceptions, to deal with the costs of smoking or pollution for example, should be limited and carefully designed.
- achieve progressivity as efficiently as possible. That means relying on the rate schedule of personal taxes and benefits - rather than inefficiently distorting the tax base - to achieve redistribution. It also means designing that rate schedule carefully to minimise the extent to which the tax system reduces employment and earnings.
Key Points for Contractors
1. The report singles out the introduction of a 'bizarre' marginal rate structure, with marginal income tax rates rising from 40% to 60% on incomes between £100,000 and £112,950, then falling back to 40% before rising again to 50%.
2. The two entirely separate taxes on earnings - income taxes and NICs are unnecessarily complex, and the report suggests that they should be merged.
3. The tax treatment of employment, self-employment and corporate-source income should be aligned.
4. The report points out that company profits are also taxed at different rates according to the level of profits, and corporation tax is not properly integrated with personal taxes, creating complexity and opportunities for avoidance.
You can download a PDF summary of the report here.
We will watch developments following on from this report, and recommendations from the newly formed Office of Tax Simplification, with great interest.
It is one thing to suggest that the tax treatment of employment, self employment, and corporate-source income (i.e. limited company contractors) should be aligned.
How this can be achieved in reality is a completely different matter.
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