Mixed blessings for NI and income tax marriage

A FORTNIGHT AGO, an overhaul of the UK tax system involved the abolition of certain reliefs, perhaps the abolition of IR35. This week, however, these look like baby steps on a journey that could end with a single National Insurance/income tax system and a simplified tax system for micro businesses. Can the leap be made?

The second Office of Tax Simplification report, this time on small and medium businesses, went even further than the first. Where the report on tax reliefs called on the government to conduct further review on the chances of merging NI and income tax, its follow up was categorical in its support. A timetable to produce such change should be in place by the end of the year. At the same time, the government should strip back the tax complications for businesses with a turnover of under £20,000.

A government commissioned report on its own would be enough to take seriously. Released the day before, the report of work and pensions secretary Iain Duncan Smith’s plans for the reform of the state pension, it seems as though there might be a government-wide push towards major reform in this area

This was a coincidence, report author John Whiting insisted. But it would remove one of the “great barriers to integration”, he said.

“To a greater or lesser extent, we are all pushing in similar directions. The Mirrlees Review looked at the theoretical end and concluded it would make sense to integrate. We’ve done the bottom-up, going round talking to businesses, finding out what causes problems, and to us it makes sense. To [business secretary Vince] Cable and Duncan Smith it makes sense.”

Mike Warburton, tax partner at Grant Thornton, said there is a real appetite for reform within the coalition government. When the Liberal Democrats were in opposition, they were in favour of a flat rate state pension and Steve Webb, the LibDem pensions minister, has done a lot of background work on the proposal. Added to the Lord Hutton review of public sector pensions in the same week, and it seems as though there is a trend towards top-to-bottom structural reform in the run-up to the Budget.

There are still the political aspects to consider, which have been discussed at length on these pages. Governments have fallen when introducing reform to the tax system, and the losers – of which there will inevitably be some from such a huge reform – are invariably more vocal than the winners.

Whiting himself does not think a full-blown integration is likely. He has been at pains to stress that even if it does not happen, moving in that direction would lead to a better system in itself.

“But as you plot it through there is a heck of a lot we can do to synchronise things – smooth out all the differences between the practice, put NI onto an annual basis like PAYE, remove the contributory principle (see below),” he said. “All these would simplify, even if you don’t feel you can get enough gas to amalgamate them because of difficulties with pensions and the like.”

There is no doubt that this government has a reforming zeal. After 13 years out of power, this is highly expected. As such, there is very little chance of chancellor George Osborne rejecting the OTS’s recommendations to at least set out stages for reform – to do so would put him at odds with the business community and be politically embarrassing. Next week’s Budget will give us some clue about how far he intends to go.