UK tax system is 'out of date'

Merging tax and national insurance contributions will help remove many problems in the tax system, the tax director for the Office of Tax Simplification (OTS) has said.

"Many of the issues come back to bringing income tax and NICs [national insurance contributions] together and we repeat our previous recommendations that merging tax and national insurance would remove many anomalies from the tax system. In particular, employers' NICs does seem to be the elephant in the room of reform," John Whiting said.

As a result of huge confusion in the area, many employers only hire contractors through intermediaries to reduce the risk of incorrect tax and national insurance contribution charges, the OTS has said in its latest report.

Employers and employees have to rely on common law to guide them as to their employment status, as there is no definition of self-employment in law.

Whiting continued: "The tax system is stuck in an out-of-date mindset. In the 1950s and 1960s the distinction between employees and the classic self-employed jobbing plumber was clear and easy.

"Nowadays working patterns are hugely varied; freelancing is a way of life for many and that simple split doesn't work often enough."

He added: "We have heard from businesses about transactions being delayed or even abandoned due to the risk posed by employment status uncertainty."

Potential solutions

One of the long-term solutions the OTS has suggested is to introduce a 'safe harbour', where in the case that an employer relies on HMRC advice and is open about its arrangements, it is protected from unintended charges.

The OTS has also suggested carrying out a feasibility study into a statutory employment test.

"This is a difficult area with no simple solutions. We identify both direct ways of simplifying things (such as streamlining definitions) and indirect ones, which would take the heat out of the issue.

"Some should be acted on in the short to medium term, others are promising routes to reform that warrant further work but which would mean major changes."

Binyamin Ali is assistant editor of Private Client Adviser