A giant leap towards further tax simplification was taken by chancellor George Osborne in his second Budget speech on Wednesday, 23 March[1]. The UK recently took over from India has having the 'longest tax code in the world' and Osborne paid tribute to the Office of Tax simplification - naming Michael Jack and John Whiting - for their independent advice on how to tackle the problem.
Income and national insurance to merge
The end of the burden imposed on employers by the anomalies and 'unnecessary' costs of having two different employment taxes with two different forms of administration is now in sight, with a commitment from the government to 'consult on merging the operations of national insurance and income tax.' The contributory principle will be maintained and NICs will not be extended to those above pension age. The chancellor conceded this would "take a number of years to complete", but maintained it was a "historical step to simplify dramatically our tax system, making it fit for the modern age."
This is no big surprise after the recent speculation, support from business and the Mirrlees Review which was published in November 2010[2]. This stated that: "national insurance is not a true social insurance scheme; it is just another tax on earnings, and the current system invites politicians to play games with NICs without acknowledging that these are essentially part of the taxation of labour income."
Employers spend an estimated £759 million a year operating both taxes while HM Revenue and Customs spends £300 million collecting NICs alone. Just calculating both as a single rate would save firms up to £55.6 million a year.
NICs were set up in 1911 to fund welfare payments but link between some benefits and NIC payments, has weakened over the years with just six state benefits dependant on them. The proposed universal flat-rate pension will further break the link.
Susan Ball, director, Crowe Clark Whitehill said "This is the biggest change to the PAYE system since 1944 and may be seen by many as a tax increase. For example, it could take the basic rate from 20p to 32p and top rate from 40p to 52p in the pound. However businesses struggle to understand the complexities and differences between items which are subject to tax and NIC. Whilst it may take a while to deliver, with an election in 2015, Universal credits and Real time Information migration complete by 2013, having something in place by 2014 has to be a real possibility and can only be of benefit in the long run to both employee's and employer's."
Other tax changes
- A total of 43 tax reliefs whose rationale is no longer valid (such as the Millennium Gift Aid relief not needed again for another 999 years!) will be abolished.
- To promote higher levels of business investment, there will be a further 1% cut in corporate tax from April 2011 down to 26%, falling to 23% by 2014, with an increase in the bank levy from January 2012 to offset the benefit to banks.
- There will be changes to the controlled foreign company rules[3] in 2012 to allow groups based in the UK to compete more effectively with those based overseas, while protecting against the artificial diversion of UK profits. A further consultation document will be published in May 2011, followed by draft legislation in autumn 2011.
- The government will consult in 2011 on modernising the administration of the personal tax system to make it more transparent and accessible to individual taxpayers.
- The government's objective is to support lower and middle income earners by eventually raising the personal allowance to 10,000, with real terms progress towards that goal every year. From 6 April, the personal allowance for under 65s increases by 1,000 to 7,475, increasing again by a further 630 to 8,105 in 2012-13, with an equivalent 630 reduction in the basic rate limit to leave the higher rate threshold unchanged ensuring no additional higher rate taxpayers are created. This aims to benefit 25 million individuals, taking 1.1 million of them out of income tax altogether.
- This year's increase occurs alongside the switch to using the CPI as the basis for indexation of the employee and self-employed national insurance threshold. To ensure employers and older people do not lose out, for the duration of this parliament the annual increases in the employer NICs threshold, and the age related allowance and other thresholds for older people, will be over-indexed compared to the CPI, and will increase by the equivalent of the RPI.
- There was also a commitment to 'explore' how the take up of Payroll Giving could be increased which "allows individuals to give through their pay and reduce their income tax bills."
Health and safety
Lord Young's health and safety review Common sense, common safety[4] is to be implemented.
Youth employment and skills
- Youth unemployment rose by 100,000 between 2004 and 2008, and has risen by a further 250,000 since the start of the recession. While participation in learning by 16 to 18 year olds has continued to rise, currently 9.4 per cent of all 16 to 24 year olds are unemployed and not in education.
- The government has invested 7.6 billion in 2011-12 in education and training for 16 to 19 year olds in addition to the 1.4 billion apprenticeship programme. There will be earlier access to the Work Programme, a move aimed to benefit up to 100,000 young people in 2011-12.
- The government will fund an additional 80,000 work experience places for young people, with the aim of making up to 100,000 places available over the next two years.
- 180 million was pledged for up to 50,000 additional apprenticeship places over the next four years. To address the specific barriers faced by SMEs in accessing apprenticeships, the government says it will support business consortia to set up and maintain advanced and higher apprenticeships schemes, supported by grants, creating a further 10,000 apprenticeships.
Economic forecasts
- The Office for Budget Responsibility (OBR) - which Osborne reminded the House forces chancellors to 'fix the budget to fix the figures' rather than the other way around forecasts a growth of 1.7% for 2011, 2.5% next year, 2.9% in 2013, 2.9% in 2014 and 2.8% in 2015.
- Inflation is forecast to remain between 4% and 5% for most of this year, dropping to 2.5% next year and to 2% in two years' time.
- Unemployment will peak this year. While public sector employment began to fall from December 2009, and was down by 132,000 in the year to December 2010, private sector employment rose by 428,000. Consistent with this, redundancies have fallen to their lowest level since August 2008. The ILO unemployment rate rose slightly in the three months to January, to 8.0 per cent. The claimant count fell in February 2011 and is down by almost 130,000 on a year earlier.
[1] http://cdn.hm-treasury.gov.uk/2011budget_complete.pdf
[2] www.ifs.org.uk/mirrleesReview
[3] www.hm-treasury.gov.uk/controlled_foreign_companies.htm
[4] www.number10.gov.uk/wp-content/uploads/402906_CommonSense_acc.pdf