The hike on national insurance contributions was always going to be a non-starter (at least in political terms). Now, the danger is that Hammond will look elsewhere to make savage cuts – and that young consumers will bear the brunt
It took George Osborne 10 weeks to climb down over the ‘pasty tax’, when his 2012 Budget slapped 20% VAT on warmed-up takeaway food. It has taken Philip Hammond only seven days to eat humble pie and retreat ignominiously from a far more serious blunder – the disastrous tax raid on the self-employed. Five years ago Osborne stood accused of being out of touch with ordinary working people. How much sharper is the jibe now, even if Jeremy Corbyn did manage to argue from both ends at once when he said big business “evades a lot of tax through bogus self-employment”.
As this blog reported immediately, Hammond let himself in for a severe backlash from Britain’s 2 million entrepreneurs following his attempt to make the 4.8m strong army of self-employed fund a £2bn injection into social care (which many argue is a bottomless pit of funding, on present assumptions.)
He claimed that raising Class 4 national insurance contributions by 1 per cent in April 2018 and by 1 per cent in April 2019 would cost every self-employed worker on average 60p more a week in tax – sounds nothing doesn’t it?
He had been persuaded, by Treasury mandarins and perhaps by the government’s chosen expert Matthew Taylor a former adviser to Tony Blair, that this would “improve the fairness of the tax system” .
But this supposedly front-line champion of Britain’s hazardous exit from the EU had seemingly forgotten that the self-employed are the lifeblood of the economy.
Yes, he was aiming to close off the tax loophole exploited by highly-paid company directors who pretend to be self-employed when they are not. So a fatcat earning £51K would have been paying another £620 a year. Boohoo. A taxi-driver earning £20K was in for a bill of £240…..and this regressive measure was pounced on by the likes of Labour MP Wes Streeting, whose Essex constituency is a black cab stronghold.
No matter that the self-employed, 15 per cent of the total workforce, have no sick pay, holiday leave, maternity benefits, redundancy rights or employer pension contributions.
The improved fairness was supposed to stem from the fact that the new state pension will give them a much better deal than in the past.
But it’s all about now, and the politics, and the judgement.
Nigel Green, who runs expat wealth manager deVere Group, called it a “stunning u-turn” , adding: “Whilst we welcome this climbdown, it does show just how out of touch this government is with Britain’s hardworking, already-squeezed and over-taxed entrepreneurs – the lifeblood of the UK economy.”
Rubbing salt in the wound, he concluded: “This grinding u-turn is now a golden opportunity for this government to go one step further and better incentivize those self-reliant individuals who take on the responsibility, risk and burden of setting up companies and creating jobs and wealth. This is perhaps more important than ever as Britain prepares to launch divorce proceedings from the EU.
“Surely, if the UK is to thrive outside the EU, it should be aiming to keep and attract more entrepreneurial self-starters.”
Steve Webb, the former LibDem pensions minister in the Coalition and now director of policy at mutual insurer Royal London, said:
“What is needed is a long-term strategy for tax, not a series of short-term announcements.
“We also need a strategy to tackle the pensions saving crisis amongst the self-employed which remains unaddressed”.
But Royal London supported the policy, and Sir Steve, as he now is, favours using enhanced NICs to fund additional pension contributions.
As we reported, Barnaby Lashbrooke, founder of the online PA platform for freelancers Time Etc noted that the rise in self-employment in recent times had “little to do with tax avoidance”.
He argues: “It’s partly the result of a skills shortage – talent is in high demand – as well as advancements in technology that have enabled the sharing economy.
“Some suggested reading material for the Chancellor might include the ONS report which attributes a rising trend in self-employment to a preference for part-time work, including among those approaching retirement, as well as the ‘net in-flows’ from unemployment since the 2000s.”
The self-employed, he said, never had the “luxury” of work benefits and always had to support themselves through lean work periods.
Or as I put it in my blog for the New Statesman last week: “ For a government obsessed with inefficiencies and those that supposedly take out less than they put in, effective freelancers are surely model citizens. By working remotely, they can move to cheaper parts of the country, generating much-needed local economic activity and putting less strain on our housing hotspots. But no. Tradespeople, taxi drivers, entrepreneurs – the huge contribution they make and the tough, precarious lives they often lead has just been reduced to how much less they pay in national insurance contributions compared to employees.”
I noted that around three quarters of NICs are effectively funding today’s triple-lock state pension guarantee, widely regarded by economists and MPs as unsustainable and unfair to current taxpayers.
And I suggested that it’s big business – not the little man – that is avoiding a fair share of tax.
THE PROBLEM NOW? This is chancellor hell-bent on spanking some sections of the tax-paying public, whether it’s the self-employed or young drivers (given that the insurance premium tax is set to go up this year), rather than tackle the real structural flaws in our tax system that allow foreign companies to avoid paying their fair share.
I’m not just talking about the Amazons and Googles of this world (and you have permission to roll your eyes at that vulgar pluralisation technique). Only today we had reports of IKEA employing haulage firms across Europe that put Eastern European workers on wages commensurate with their native countries, despite living and working in places with far higher pay rates and costs (such as ours). The BBC report focused mainly on the human side of this corporate sliminess, with truckers forced to sleep in their cabs for months on end due to the pathetic living expenses they were allowed when working across Europe, but what really shocked me was the admission towards the end, from the head of the main association representing truckers in the UK, that the Treasury loses out on higher national insurance contributions that really should be made by these haulage firms. The true cost of this mass avoidance? Unknown, but who wants to bet that it’s far too high?
So when we bore witness to lavish promises about bridging the funding gap in social care, you have to ask; where is the money going to come from? Rooting out companies who dodge their tax responsibilities or hitting workers themselves? We have already seen tweaks to the tax credit system that punishes 600,000 families with three children to the tune of £2500 a year. This along with a reduction in the family element of tax credits rakes in about £5bn a year, far more than what the NIC policy change would have raised (£2bn).
Yet this got very little coverage in the press, and much of the pain is coming down the track (that IPT rise, the change to the Ogden rate for drivers, the withdrawal of Help to Buy)…I could go on but I won’t.
The point is that now more than ever, we need an opposition that not only fights for social justice (all fair and well) but has the killer political instinct to make sure that our government doesn’t get away with egregious economic incompetence; hurting the self-employed while failing to tackle the huge NIC and VAT liabilities linked to foreign businesses, who are all too keen to exploit Britain’s R-A-F tax infrastructure.
That stands for “ropey as f***”, in case you were wondering.