Ross Clark

    The problem with taxing the self-employed

    The problem with taxing the self-employed
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    Last year, when Rishi Sunak, after some dithering, came up with a scheme to help the self-employed during the pandemic, he made clear that it would come with a quid pro ro: higher taxes for the self-employed in the longer run. With his second Budget coming up on 3 March will he take the initiative and do what governments have been threatening to do for years – and jack up national insurance to bring it in line with the rate paid by employees?

    The gap between NI contributions – employees generally pay 12 per cent and their employers a further 13.8 per cent, while the self-employed generally pay 9 per cent – is frequently raised as a possible source of extra revenue. Each time the self-employed fight back. Philip Hammond tried his luck and had to retreat, after finding out just how important a group the self-employed are to the Conservative party.

    But does the current system really give a free ride for the self-employed? While they pay less, they qualify for fewer benefits. They cannot, for example, claim statutory sick pay. Sunak’s furlough scheme, too, discriminated against the self-employed, who were unable to claim a penny if their earnings in previous years had exceeded £50,000 a year. There was no such threshold barring employees from claiming furlough payments.

    Moreover, that nine per cent isn’t the only National Insurance contribution that the self-employed pay: additionally they must pay “Class 2 contributions” which are a flat rate of £3.05 per week. But most of all, they are liable to levy VAT on their labour if they earn over £85,000 a year. How would high-paid employees react if their salaries were liable for VAT at 20 per cent and they had to hand one sixth of their gross earnings to HMRC before they even got down to paying income tax and national insurance? I suspect not very well.

    The real unfairness with National Insurance isn’t between the employed and the self-employed; it is between people working for a living and those living off their investments. The latter pay no National Insurance at all. Yet they are not frozen out of the welfare state should their investments turn bad and they end up relying on state charity. We have gone from a situation in the 1970s where unearned incomes were punitively taxed to one where workers are the ones stung for higher taxes.

    Far better than equalising National Insurance rates would be to abolish the whole concept altogether and shift the burden onto income tax, payable at the same rate if the money is earned or unearned. In fact, why not go the whole hog and have a flat tax which charges capital gains and inheritance at the same rate, too?

    Besides a tax raid on the self-employed, there is another nasty which has been floated before the Chancellor, although one which I suspect he will reject. Deutsche Bank has suggested a ‘working from home’ tax as a means of extracting extra revenue as the government attempts to rebalance the books. It suggested taxing five per cent of wages for those who work at home, claiming that they could afford it because this is the kind of money they are saving by not commuting.

    There is bit of a loophole here. How would the government define ‘working from home’? Presumably I would qualify if I worked from a spare bedroom – or from my garden shed. But what if I worked from my neighbour’s garden shed (I could do a straight swap if my neighbour wanted to avoid the tax, too)? I wouldn’t be at home, so presumably I would escape the tax.

    But there is a slight incentive problem, too. Doesn’t the government want us to commute less, generating fewer carbon emissions and putting less strain on public transport? The government will save a huge amount of money if the shift to working from home becomes permanent. It will have to subsidise fewer buses, trains and build fewer roads. Indeed, the government introduced a workplace parking tax specifically to dissuade us from driving to work. It would be bizarre if it now taxed us extra for working from home, too. If anything, working from home ought to qualify for a tax cut.

    Written byRoss Clark

    Ross Clark is a leader writer and columnist who, besides three decades with The Spectator, writes for the Daily Telegraph and several other newspapers

    Topics in this articleMoneyEconomy