Full merger of income tax and NI heads for long grass
The Government has admitted it can see the potential benefits of closer integration of income tax and National Insurance - but any change could be a long time away.
Responding to its initial call for evidence on the possible merger of income tax and NI, the Government has said that it wants to continue to examine the issue and has called for applications to join technical groups to take further evidence and research on board.
The merger of income tax and NI has long been mooted as a possibility to streamline the personal tax system and ease the administrative burden on employers. Most recently, the Office of Tax Simplification (OTS) also raised the issue and it was generally believed that a merger of the two tax systems would go some way to make IR35 redundant.
In its response to the latest consultation, the Treasury said: "Overall, there is a strong case for developing proposals for reform, focused on the areas identified in the call for evidence. However, the evidence suggests it would not be appropriate to rush this reform and that instead the Government should embark on extensive consultation, in recognition of the scale of this reform and its potential impacts."
Full merger
However, the Government hinted that something short of full merger of income tax and NI may be on the cards. The parameters of the work reinforced the contributory principle of NI, which is paid for by those in work. It was reconfirmed that NI will remain a charge on earnings of working-age individuals and not be extended to other forms of income such as pensions, savings and dividends.
The report said: "However, these parameters do not constrain the scope of the operation of National Insurance to be fundamentally reformed. The National Insurance system needs reform to reflect changes in the labour market over the past 60 years.
"The system put in place in 1948 was designed for a labour market in which most households had one (male) earner, most earners had only one employment, and very few worked overseas. The labour market has since become markedly less homogeneous, with greater part-time working, more people working for several employers, more people working in both employment and self-employment, and much greater international movement. There may be ways to change the way the system works to better suit the modern labour market.
"The Government recognises that this falls short of the full merger of income tax and NICs called for by, amongst others, the Institute for Fiscal Studies. However, the Government wants to explore whether closer operational integration that retains a separate NICs identity is a worthwhile goal on its own merits."