ITS ALL IN THE MIND!

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IT’S ALL IN THE MIND!

I recently attended the Hardman Lecture, one of the ICAEW Tax Faculty’s annual flagship events that I try not to miss.  The speaker was Paul Johnson, an economist who is Director of the Institute for Fiscal Studies.  He spoke on “Tax, its role in our future”.  But I don’t want to comment on his talk.  There was something he said and his answer to one of the questions both of which started me thinking about the gulf that sometimes appears between perception and reality.

The first is student loans.  Paul welcomed the fact that the government has at last recognised that the bad debts on student loans ought to feature as government expenditure.  But in reality there are no bad debts on student loans; that is because they are not really loans at all.

The real deal with the student is that the graduate has to pay the State 9% of his earnings over £25,725 a year.  The Office for National Statistics say that average earnings for August 2019 was £28,184.  However, the average for, say, a 25-year old is likely to be significantly less.  In other words, the deal is that the student should pay the State 9% of the extra earnings that he can generate by virtue of his degree.  If his earnings are less than £25,725 (actually if his earnings in a week are less than £494) he has no obligation to repay anything.  The repayments are capped.  They stop when the total paid becomes equal to the initial financial support plus interest thereon.  If the aggregate payments after 30 years are less than that amount, nothing further is payable.

That is not a loan; it is a graduate tax.  But of course there would be uproar if the government said that they intended to impose a 9% tax on education.  Calling it a loan sounds much more acceptable.  But a problem with putting a false label on a product is people start to believe the label.  This can have unfortunate side effects.  For a start, both students and lenders which should know better treat it as a loan when the student wants to borrow to buy a flat.  That is unfair.  The “student loan” has no real effect on his borrowing capacity; its effect is that 9% of the top slice of his earnings is not available to make mortgage payments, so the lender ought to reduce the earnings by that 9% in deciding what multiple of earnings it is prepared to lend.

Similarly, the government should not bring the “bad debt” into the national accounts.  An amount that is never due to be paid is clearly not a bad debt in any rational interpretation of the word.  It should bring into account the whole expenditure on educating the student while he is at university and should credit to the national accounts the receipts from graduates.  That would really make the national accounts look sick.  But it is better to face up to the reality, than to disguise it. 

The second issue is National Insurance.  Anita Monteith, the Tax Faculty’s senior manager asked Paul whether he thought that tax and National Insurance for the employed and self-employed should be brought into line and he agreed that would be a good idea.  I have a lot of respect for Anita, but not in this instance.  They seem to me to be already in line with one another.

An employer pays 12% NI on the slice of earnings between £166 and £962 a week.  I make that £4,967.04.  He also pays 2% on the excess over £962 (£50,024 pa).  A self-employed individual pays 9% on profits between £8,632 and £50,000, which comes to £3,724.12.  He also pays £3 a week Class 2 contribution, so his total NI is £3,880.12.  He also pays the same 2% on the excess over £50,000 as an employee.  So he pays £1,086.92 (£20.90 a week) less than the employee.  However, the self-employed individual does not qualify for jobseekers allowance of £73.10 a week when he is out of work, so the £1,086 saving could be said to reflect that ineligibility to benefit.  Both pay the same income tax, although the employee pays it only on what he is free to spend, whereas the self-employed individual also has to pay more income tax on money which he cannot spend as it is needed to provide capital in the business.  There is also a different treatment of expenses.  It is very difficult for an employee to obtain a deduction for expenses, but that is because HMRC and the government expect the employer to pay its own business expenses, not require the employee to pay them out of his salary, and the test for expenses of the employer and the self-employed is identical.

What Anita and Paul are really concerned about is the employee’s National Insurance contribution.  But that is not a tax on the employee.  It gives no insurance benefit to the employee.  If the employer is non-UK resident, no employer’s contribution is payable even though his UK resident employee still has to pay the employee’s NI.

The reality is that the employee’s NI contribution is a payroll tax.  Most economists think that payroll taxes are not a good idea.  They discourage employment.  If full employment is a good thing (it probably isn’t actually, but 96% employment is) anything that discourages it is a bad thing.  It also encourages businesses to look for alternatives to employment, which normally means more computerisation, which is a good thing only if it is done in such a way that the displaced workers can readily find other work.

It also distorts the tax burden on employers, particularly corporate employers.  The government are proud of their 17% headline rate of corporation tax, which is amongst the lowest for developed countries.  But that 17% is a lie.  Suppose a company has income of £1million, salary payments of £600,000 and other expenses of £300,000 and that 90% of its salary payments attract 13.8% NI.  It pays 17% tax on its profit of £100,000, a mere £17,000.  But that is misleading.  It also pays payroll taxes of 13.8% of 90% of £600,000, which is £74,520.  So its real tax burden is £91,520, which is over 90% of its £100,000.  But “the UK is open for business; move your business to the UK and pay tax of only 91%” is somewhat less attractive than a 17% rate.

The mis-labelling though creates a perception that there is an unfair differential between tax and NI on employment and self-employment.  That perception (I nearly wrote deception, which may be more accurate) – combined with the fact that the government and HMRC seem happy to allow closely-held companies to reward work done by their directors by way of dividend (which does not attract NI at all) rather than salary – is largely responsible both for the massive growth in personal services companies and the highly complex IR35 legislation which vainly seeks to counter the resultant loss of NI receipts.  That loss is directly attributable to the government allowing “employers” to avoid having to apply PAYE and NI by engaging “staff” via personal services companies while at the same time allowing those companies to escape NI by replacing salary with dividends.

ROBERT MAAS