Government begins income tax/NICs reform

The Government has begun its consideration of integrating income tax and National Insurance by calling for evidence.

The idea was floated in this year's Budget and this development is a preliminary stage of consultation, and aims to build a strong evidence base on the burdens to employers of having to operate two different systems. Responses to this call for evidence will inform the Government's proposals for reform, on which it will consult in the autumn. The two systems are currently operated entirely separately and the Government believes that greater integration of the two has the potential to remove economic distortions, reduce burdens on business, and improve fairness for individual earners.

The call for evidence document poses 14 questions, the majority of which focus on the burdens employers and payroll professionals face in paying income tax and NICs through the Pay As You Earn system.

For example, how much staff time and other resource is required to manage the systems, which aspects of the process currently work well and how often problems are encountered when calculating payments.

Radical reform

David Gauke, Exchequer Secretary to the Treasury, said: "The Government is committed to a programme of tax reform that aims to make the UK tax system the most competitive in the G20 for business, and simpler to understand for individual taxpayers. Greater integration of income tax and NICs will be a radical reform, but we believe that it has potential to bring real improvements.

This is a first step in our consideration of this matter and we would like to hear from businesses and other stakeholders before we move on to further consultation later in the year."

The Government recognises that income tax and NICs were introduced for different reasons and believes that they continue to have different rationales. As stated at Budget 2011, the Government will maintain the contributory principle that underpins the National Insurance system, and ensure this will be reflected in any proposed reforms.

NICs will not be extended to individuals above State Pension Age or to pensions, savings and dividends.

The Office of Tax Simplification's interim Small Business Tax review of March 2011 highlighted the appetite among small businesses and tax practitioners for the two systems to be simplified. A similar recommendation was made by the Mirrlees review of the UK tax system by the Institute for Fiscal Studies. A number of representatives of UK businesses have also called for action to reduce the costs of running the two systems.

Harmonising

The move to address this issue was welcomed by the Chartered Institute of Taxation (CIOT), who has long argued that the inefficiencies and administrative burdens caused by the separate levies needed to be addressed.

Anthony Thomas, President of the CIOT said: "The Government deserve congratulations on finally grasping a nettle that successive administrations have shied away from. As the Office of Tax Simplification's recent report showed, there are real administrative savings, for employers and for HMRC, in harmonising the way the two taxes are run.

"The Government's approach of evidence-gathering over the summer, followed by a formal consultation document in the autumn, is sensible. There are risks to this process and it is right that the Government proceed carefully. They are right to have ruled out extending NICs to pensions or to savings income at the present time, as this aspect could otherwise have overshadowed the consultation process.

"However within the boundaries the Government have set, there is both scope and need for the Government to think widely and aim for real simplification. That can benefit employers, taxpayers and HMRC alike."

Differences

The main areas of difference between the current income tax and NIC systems are:

• Differences in the definition of income subject to the two levies;
  
• The annual, cumulative system for income tax/PAYE and the largely weekly or monthly approach that applies for NICs;
  
• The varying types of contribution of NICs, including Class 2 and Class 4 for the self-employed; and
  
• The residual link to the state pension and some contributory benefits that applies for NICs.

The deadline for responses to the call for evidence is September 19 2011.

The details of the call for evidence can be found on the Treasury's website.