ICAS Calls For Merger Of UK Income Tax And NICs

by Amanda Banks, Tax-News.com, London

14 December 2010

The Institute of Chartered Accountants of Scotland (ICAS) has called for the amalgamation of National Insurance Contributions (NICs) paid by employees and the self-employed with the payment of individual income tax to simplify tax compliance in the United Kingdom.

A submission to the Office of Tax Simplification, developed by the ICAS Small Business Tax Sub-Committee, claims there would be large savings in administrative costs for HM Revenue and Customs and businesses from merging the parallel but distinctly different rules for the two levies. To preserve existing differentials in effective tax rates, an income tax ‘earned income surcharge’ could be levied on taxable earned income (excluding pensions) received by all those under State Pension age, ICAS has recommended.

Ian Dewar, ICAS Small Business Tax Convenor, said: “A new levy which merges income tax and NICs would be a positive step towards simplification. We would like to see a level playing field, with a single set of rules for taxing all earned income of those of working age regardless of their employment status, and entitlement to state benefits also uniform across that population.”

“For small businesses, the administrative hassle of operating PAYE (pay-as-you-earn) is a key factor in discouraging the creation of new jobs. Many businesses choose to remain very small rather than take the huge step involved in taking on their first employee. Our suggestion would go a long way towards simplifying the calculation of PAYE and making payroll administration less of a deterrent to business growth.”

“The [amalgamation] of NICs with income tax, and the removal of the difference in rates between self-employed and employed, would not only introduce a huge simplification but also lessen concerns of tax loss due to employment status, which have led to measures such as the Construction Industry Scheme and the IR35 anti-avoidance regime.”

“Politically, the merger of income tax and NICs would require bravery as it would finally make people aware of their real marginal rates of tax. However, it would bring substantial benefits by simplifying the tax regime.”

The ICAS submission offers other tax simplification recommendations, some of which flow from the merger of income tax and NICs. Other recommendations include a simplified replacement to IR35, which ICAS suggested could be found through a new earned income surcharge, which could be applied to director- or employee-related dividends unless certain conditions are met regarding acceptable distribution policy.

In addition, ICAS has called for consultation on the possibility of introducing a ‘see through’ option that would allow small UK business entities to elect whether they should be taxed as incorporated or unincorporated, regardless of their actual legal form. It claims that such a system would allow some businesses to respond to third party pressures to incorporate while retaining the simplicity of a see-through tax regime which they could more readily understand, and enable others to keep their simpler unincorporated form while having the ability to grow by retaining profits subject only to corporation tax.

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