Taxing times as General Election called

Outside 10 Downing Street yesterday, the Prime Minister said that Labour had threatened to vote against the final Brexit agreement, the Liberal Democrats wanted to “grind the business of government to a standstill”, the SNP would vote against the legislation that formally repeals Britain’s membership of the EU – and “unelected” members of the House of Lords had vowed to fight the Government “every step of the way”.

The Prime Minister concluded that, “If we don’t hold a general election now, their political game-playing will continue and the negotiations with the European Union will reach their most difficult stage in the run up to the next general election”.

So, it’s clear that a European Union justification is being made for this snap election, and that the decision is heavily politically motivated.

However, there are much wider implications.

When hearing this surprise announcement my first thought was not of the impact on European matters or party political motives but of my prediction just a month ago that the Chancellors U-turn on National Insurance Contribution (NIC) increases may not end up being all it seemed at the time.

Those with a sharp eye for detail may recall that the Chancellor clearly stated in his infamous NICs U-turn correspondence to all Conservative MPs that, “There will be no increases in NICs rates in this Parliament.”

Whilst this was taken to mean at least until 2020, my concern was that “this Parliament” could be much shorter and the changes could still be made in the same, if not a similar timeframe.

We hope that the fall out of previous attempts to alter NICs for the self-employed will result in much more careful consideration of the subject.

The Taylor Review is already looking at the issue of self-employment from an employment rights perspective. It’s time there was a similar review or consultation to consider the tax implications, not least because the recent explosion in self-employment is eroding the tax base and the advent of the gig economy is increasingly making our tax system look outdated.

AAT has long argued that Government should not be focussing on the NICs of the self-employed but instead on employers NICs and ‘gig allowances’.

‘Gig allowances’ should be increased to simplify tax matters and to help those who are just about managing – JAMs as the political classes call them – to make a living by undertaking various “gigs”.

Given the difficult nature of dealing with those who have multiple income streams – from a tax perspective – and that many of these incomes are relatively small, a bigger ‘gig allowance’ would make sense.

As AAT set out in our response to the Spring Budget, if attempts to increase NICs for the self-employed were genuinely about moving towards a level playing field, then it might be sensible to look at reducing NICs for the employed to further narrow or even eliminate the discrepancy between the employed and self-employed. This would simplify matters as well as helping to ensure fiscal neutrality.

The NICs increase is just one of many issues that may now have to be revisited due to the election.

On 23 March 2017 the independent Cridland Review of the State Pension Age “Smoothing the transition” was published. The terms of reference required that recommendations should be affordable in the long term, fair to current and future generations of pensioners, and consistent with supporting fuller working lives.

The final review concluded that the State Pension Age should rise to 68 by 2039 instead of 2046 and that the “triple lock” be scrapped “in the next Parliament”. Again, “next Parliament” was envisaged as 2020 not in a few weeks time. The triple lock means that state pension payments rise every year in line with whichever is the highest of average wages, inflation, or 2.5%.

The Government had committed to responding to the Cridland review next month but clearly that cannot happen now. No Government would be foolish enough to commit itself to a guaranteed vote loser weeks before an election and equally no sensible Government would commit itself to ruling out changes that are likely to be financially necessary. The most likely response is therefore delay.

One final policy proposal that sprang to mind as the Prime Minister stood outside Number 10 on Tuesday was last week’s Labour Party promise to reduce the £36bn tax gap by closing loopholes and exposing “sweetheart” deals between big business and HMRC.

Populist policies like this will face much more scrutiny now that an election has been called and are liable to exposure themselves. Political parties of all colours have been promising to clamp down on loopholes and close the tax gap for decades and yet as HMRC figures show, the gap has fluctuated rather than enjoying year-on-year reductions.

The Labour Party has made various other policy commitments in recent weeks, from providing universal free school meals to a £10 an hour national living wage and promises relating to the Prompt Payment Code. As the election campaign gets underway these will all come under increasing scrutiny.

It’s clear that irrespective of political party, the small print always needs to be heeded, especially when financial commitments are involved.

Phil Hall is AAT's Head of Public Affairs and Public Policy.