Dated: 10 March 2011

The IoD today responded to the report from the Office of Tax Simplification (OTS) on the taxation of small businesses. The OTS’s conclusions may not all be the right ones, but this is a great opportunity to set off a debate that could make a real difference to our tax system.

• There will be a lot of debate about merging income tax and national insurance. Until we have that debate, we cannot be sure what the best way forward will be. Businesses will be particularly concerned about the possible consequences for employers’ national insurance, a tax on jobs that raises considerably more revenue than corporation tax. But we certainly should have the debate, and decide whether to move towards a single tax on earnings, or to go on having two parallel taxes. The OTS is quite right to call for a clear timetable for work, if the idea of merger is to be taken forward.

• Other highly contentious areas will be the boundary between employment and self-employment, and the treatment of contractors who may or may not be caught by IR35. We can all support clarity: it should be easy for each person to work out his or her tax status. We are therefore disappointed that a new business test is only a third option for short-term change to IR35, rather than being the lead option.

• In the longer term, there is one big question to answer. Should different ways of working be taxed differently because of factors such as the risk of fluctuating earnings and the investment of capital, or should the tax system treat income from all ways of working the same? We must not duck that question.

• Some of the quick wins – administrative improvements and de minimis limits for employee expenses – are worthwhile ideas that the Government should take forward. We have more doubts about the proposal for flat rate business expenses that might bear little relationship to the correct figures.

Richard Baron, Head of Taxation at the IoD, commented:

“This report raises more questions than it answers. But that is a good thing. Businesses repeatedly complain about the administrative burdens that are imposed by the tax system. We can, and should, implement some quick wins. But to do more than that, we must look again at some fundamental features of our tax system.”