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A Modest Proposal

August 5, 2013

The problem with actors is that they never know whether they’re going to make any money or not – like a minimum wage worker on a zero hours contract.  The work they do is usually significantly more enjoyable and fulfilling than zero hours contract work, and there is the faint but real possibility of making lottery-winner money out of one successful contract.  After all, someone has to be Obi Wan and walk away with 2% of the Star Wars gross, even if most of us know our fate is to be the equivalent of the unfortunate stormtrooper who bashed his head on the doorway.

But think about this for a moment.  Alec Guiness died in 2000.  His estate still receives his 2%.  But should the payer deduction National Insurance before they pay it?

Yes, you may boggle.  The vexed question of actors, musicians and other entertainers comes up again in the HMRC consultation (which closes tomorrow) on “National Insurance and Self-employed Entertainers“.

What’s it about?  Well, actors are usually self employed for income tax purposes… but because they often need to claim benefits in the early stages of their careers when they are between engagements, they are employees for National Insurance purposes, so that they build up sufficient contributions to be able to claim JSA.

But, well, times change.  There’s a fundamental question about whether the royalties Sir Alec Guinness’ estate is receiving now from Star Wars is actually income from his engagement on the production (the work of acting itself) or from the intellectual property inherent in his performance.  And – not to put too fine a point on it – there’s a growing tendency for films and tv productions to be financed by special purpose vehicles (companies set up just for the duration of the production itself) and for the income stream then to come from various sources like dvd sales and downloads, and there’s an argument that making a cable tv company in Seattle, say, pay a few pence of residuals to an actor in Notting Hill under deduction of NICs is both administratively burdensome and damaging to the UK creative industries’ competitiveness.  And since the government has just introduced a tax break for the creative industries, it makes some sort of sense to make sure you’re not giving with one hand and taking away with the other…

Actually it’s rubbish.  There are two fundamental difficulties with this consultation: the difficulty of distinguishing between employment and self employment, and the difficulty in having different rules for Income Tax and National Insurance contributions.  Instead of faffing about with a piecemeal change like this one, how about doing something radical about simplicity?

So I have a Modest Proposal.

Abolish the differences between employment and self employment.

All of them.

Employment is under PAYE and self employment under SA , and the government couldn’t do without the steady cash flow it gets from PAYE receipts?  Easy!  Make PAYE a requirement of Limited Company status – if you’re a limited company, you can’t pay anyone – and I mean anyone – without deducting the tax first.  If you’re an individual, you don’t have to operate PAYE, you pay any employees gross, full stop.

Expenses are calculated differently for employed and self employed people?  Easy!  Make them the same.  Currently it’s expenses “wholly and exclusively” incurred if you’re self-employed, and “wholly, exclusively and necessarily” if you’re employed.  Abolish “necessarily”.  But if you work for a company and you are paid under PAYE you won’t have to make a tax return… unless you want to claim expenses.  And if you want to claim expenses they’d better be legitimate expenses, because HMRC will have a new squad of auditors who will examine a random selection of PAYE expense claims and you’ll be heavily penalised for, well, taking the piss.

Tax and National Insurance have different rules?  Abolish them!  Abolish the different rates of National Insurance, and instead decide what National Insurance is for.  Does it actually still pay for pensions, maternity pay, unemployment benefits and sickness pay?  Fine.  Calculate how much that came to in the last tax year, divide that by the amount of employment pay and self employment turnover there was in the last tax year, and multiply by 100.  That gives you what percentage NI will be charged at.

Hypothecate it.

Charge the NI rate that will produce the sum you need, and the tax rate that you think you can get away with (where “you” = “the government of the day”)

Employees have different rights from the self employed?  Why?  If I’m employed by a multinational and a piece of their equipment falls on me, I’ll sue them and (depending on the circumstances) they’ll pay me compensation.  If I employ a cleaning lady for a couple of hours and my stepladder breaks under her, she’ll sue me – and my household insurance will cover me (if I read the small print correctly)

Benefits?  You get jobseeker’s allowance, to be replaced by universal credit, if you lose a position as an employee, but not if you’re going through a bad patch as a self employed person.  Why?  (And, if we went with a Citizen’s Income, instead of universal credit, it would be even less of an issue.)

Now wouldn’t THAT be a simplification worth having???

Sigh.

(Here’s what I sent in response to the consultation, if you’re still interested…)

This is an individual’s response and is also published, with commentary, on my blog at http://tiintax.com.

Question 1: Do you agree that current NICs treatment of entertainers under the Social Security (Categorisation of Earners) Regulations 1978 needs to be changed?

I’m not sure about “needs” but I’m willing to accept it would be a positive change. However see my response to question 6 and the blog entry associated with this response: I think a radical simplification of the treatment of employment/self employment would be a more productive use of legislative and policy effort.

Question 2: Do you agree that self-employed entertainers should be removed from the Class 1 NICs regime? Please give reasons for your answer.
No response

Question 3: Do you agree that self-employed entertainers should be placed in the Class 2 and 4 NICs regime?
No response

Question 4: If you answered “Yes” to Question 3, which of the two possible options discussed in this chapter do you believe should be adopted?
No response

Question 5: Having considered Chapter 9, do you agree that Option 4 should be implemented as the future NICs treatment of entertainers?

I think your proposals seem logical, reasonable and acceptable, but only in the microcosm of considering the position of this particular small group of workers and the detail of this one industry. I think if you were to look more widely at the difference between employment and self employment, and at the same time at a radical simplification of the NI system, it would be a more productive use of policy resources.

Question 6: Do you have any other comments you would like to make about the information contained in this consultation document, or information which you believe is relevant to this consultation?

The coalition government set out its priorities for the tax system as making it simpler, fairer, greener and more competitive. I think that this will make the tax system more complicated rather than simpler, and will not greatly contribute to the other three priorities, and that therefore you should be looking more widely at a more radical simplification, such as abolishing the distinction between employment and unemployment.

Question 7: Do you agree with our assessment of the Taxes impacts of Option 4? If not, please provide evidence for this.

Absolutely not! The whole point of an impact assessment is that it should be a decision-making tool, a way of enabling you to make a rational, evidence-based choice between a number of reasonable options. In this instance you have costed out the benefits of your preferred option but have made no effort whatsoever that I can see to weigh up the costs and benefits of the other options you have put on the table.

Additionally your impact assessment suggests there are no “other impacts” when there will, of course, be a significant impact on a number of small and micro entities – the small firms impact test should be conducted and the evidence weighed of the impact on the smaller end of the market, in accordance with published government guidance, before any final decision is made.

Kind regards

6 comments

  1. Some good thoughts there. I agree that having Class 1 and Class 4 NI is a bit pointless, and having different rules for NI and income tax is just irritating. Merging them all into a second band of IT would be very nice, if it effectively just brings the IT rates to say 30%, 42% and 47% (though it could still be presented as tax plus NI).

    A few potential problems come to mind with the employment/self-employment split, though:

    – What about partnerships: do they need to operate PAYE? Some of them are a lot larger than most companies. As are some sole proprietors, to be honest.
    – Ditto LLPs.
    – How would this interact with CIS?
    – How would you persuade HMRC that allowing sole traders to pay people gross would not increase the amount of evasion and the blackish-grey economy?
    – Do you really mean “and I mean anyone”? What about buying sandwiches for lunches from the sole-trader shop round the corner? If you do, how is the shop meant to distinguish this from normal customers, and reclaim the tax? If not, how does the company distinguish between buying sandwiches, paying the window cleaner every month, paying the cleaner every week, and paying the IT guy who comes in every now and then to fix a problem?
    – If you mean to limit it to payment for services rather than goods, how do we cope with supply-and-fit contracts?
    – What about dividends paid to shareholder directors?
    – What about dividends paid to employees who have a small shareholding in the company?
    – What about profits retained in the business by shareholder employees rather than being paid out as either salary or dividends, but then distributed either when the shareholder no longer works for the business, or when the company is sold?

    My own feeling is that the main problem with the split is secondary NI. It’d be fairly simple to align Class 4 and Class 1 (and ditch Class 2 – what is the point?), and the expenses rules, but secondary NI is always going to be an issue unless it’s done away with and rolled into primary – which would probably hit employees quite hard, at least in the first few years, as I doubt gross salaries would adjust to cope..


    • Andrew: the sandwich issue. I’m proposing that the requirement to deduct PAYE should rest not with the payee but with the payer. So if you or I go to buy a sandwich (or employ a carer, or instruct a solicitor…) we don’t have to worry our pretty little heads about deducting tax, because we’re individuals – trading or non-trading, we’re individuals so we pay gross. But if we’re TaxAdvisorsRUs Ltd sending one of our employees out to buy sandwiches for our board meeting, we still pay the same price… and add the amount to our RTI listing and pay the tax on the grossed up amount. Or we bung our employee a few quid out of petty cash and let them buy as an individual… and either have to keep the payment off-balance sheet (in which case it’s actually come from the individual director who forked over the money, and the individual director wouldn’t be subject to paying PAYE anyway) or else the company is committing a criminal offence by disguising the payment as non-PAYEable when it clearly is.

      On partnerships, LLPs and so on; they’d all count as companies – an individual is an individual, but any other form of trading is subject to the “company” rules for PAYE. In other words, an ordinary person never has to worry about it. But a trader taking advice about an effective vehicle through which to do business has to take into account the requirement to operate PAYE if they choose to enter into some kind of structure.

      And CIS? Abolished! Why would you need it? If you’re an individual, you pay gross. If you’re a company, you deduct tax. When you’re paid, you’ve been paid. But if you want to claim expenses against your pay, you need to keep records and put in an SA return.

      I’m not saying I have all the answers. But it’s a damned good question!


      • I’m not sure I follow with the sandwich issue: it seems to lead to a lot of complications.

        If a company buys a sandwich from an individual it needs to gross up the amount and pay over PAYE, so a £4 sandwich costs it £5 (including £1 in PAYE). If it buys it from a comapny, it only costs £4, so we have the same good costing different amounts depending who you buy it from. It’d make the comapny’s accounting complex, and it would mean tax driving the commercial decision of who to buy from.

        Conversely, if a sandwich-seller (sole trader or company) sells to an individual buyer then they’ve received £4 which is taxable, but if they sell to a company they get £4 on which the tax has already been paid. That’s got to make their accounting complicated – and open to abuse – hasn’t it?

        And if the company buys sandwiches out of petty cash to avoid the PAYE then we have some sort of evasion going on, I think: we at least get the potential for it.

        It also seems odd to say that a sole trader doesn’t have to operate PAYE but a partnership does. It would be a barrier to expanding businesses, and probably to retiring from one too – if my partner in a 2-partner firm retires, my accounting suddenly changes.

        Overall, I think your ideas about how much tax is due are interesting, but I’m not sure that the mechanism for collecting it would work very well 🙂

        I’d much rather have similar systems for all taxpayers: that’s normally simpler and less open to abuse.


  2. Andrew: would what I’m suggesting really be more difficult to grasp than VAT??? If I buy a cup of coffee I know I’ll be charged a different amount if I drink it in the coffee shop or in the street outside.

    And as for “similar systems for all taxpayers: that’s normally simpler and less open to abuse.” I quite agree – which is why I think the distinction between employment and self employment has passed its best-by date.


    • And the coffee example is one where there’s a lot of confusion and avoidance 🙂 Although to be fair I think that’s due to HMRC stretching “a supply of catering” beyond reasonable limits, so I can’t get too worked up about people buying a take-away coffee and sitting in the coffee shop to drink it, even if technically it might be ground for dismissal from the CIOT if I were to do it myself (perish the thought 😉 ).

      I think you’d really be getting close to having two parallel taxes on sales, one being potentially reclaimable as input VAT and one potentially reclaimable as income tax deducted at source. I think the current system is better: I think it’s easier to include some select people in PAYE (ie all employees) than to have two regimes operating across the board. Just my opinion, of course 🙂


  3. Reblogged this on A Life Less Vanilla and commented:
    Brilliant – and funny



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