U-turn on Class 4 NICs leaves ‘£2bn hole’, says KPMG

Chancellor Philip Hammond’s announcement that he has reversed his decision to increase Class 4 national insurance contributions will leave a “£2bn hole to fill over the next five years”, according to KPMG.

The firm said that the U-turn “does not alter the need for a fundamental review of the way we tax work” and that the current tax system is still in need of reform to bring it in line with modern work practices.

Michael Lavan, tax director at KPMG in the UK said that in the chancellor’s letter sent to Conservative MPs yesterday, he “again highlighted the importance being placed on the findings of the Taylor Review which will be published in the summer. It is hoped that this review will provide a springboard for proposals in the Autumn Budget, and lead to a more fundamental narrowing of the current fiscal differences between employment and self-employment. Only then will we see a move away from the confusing and ineffective sticking-plaster approach to tax policy when seeking to address the challenges around the taxation of labour.”

Addressing the House of Commons yesterday, Hammond said that the proposed Class 4 NICs increase “sought to reflect more fairly the differences in entitlement in the contributions made by the self-employed”, but that there had been widespread questioning about whether the increase was “compatible” with the tax lock commitments made in the party’s 2015 manifesto.

Hammond said that the tax lock intended to apply to Class 1 contributions only, therefore the proposed Class 4 increases were “within the constraints set out by the tax lock legislation and spending ring fences”. However, the chancellor said that it was “very important” that the government complied with “not just the letter but the spirit of the commitments that were made”, prompting the decision to abandon the increase in the current parliament.

The decision was welcomed by the Association of Accounting Technicians (AAT). Phil Hall, head of public affairs & public policy said: “Whilst political arguments about breaking manifesto commitments were never matters with which AAT concerned itself, the issue was of concern to many of our members from a tax perspective. As a result we lobbied MPs to abandon these plans or to modify them and are therefore pleased with today’s decision.”

“When the government looks at this issue again, if the large differential in NICs for employed and self-employed workers really is no longer justified and ‘undermines the fairness of the tax system’ as was suggested, then any steps taken to address this imbalance should be revenue neutral,” he added.

Richard Godmon, head of tax at Menzies expressed concern about the government’s ability to stand by their decisions. He said: “The proposed increase in tax for the self-employed was designed to move the tax system closer to being rational, bringing the taxes paid by the self-employed closer to those paid by employees. It was however small beer in the scheme of things, so to have back tracked so soon on a small issue doesn’t bode well for when the going gets tough on the bigger issues that are yet to faced, such as Brexit, industrial strategy and housing for example. Let’s hope the government has a stronger will in the future, business deserves to know that proposals will stand up to headwinds.”

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