National Insurance for Self-Employed People

The Social Security Advisory Committee (SSAC) has published a summary of its study of Social Security Provision and the Self-Employed. This notes the disparity between the National Insurance contributions payable by a self-employed person and an employee on similar earnings (especially if the employer’s contributions are also taken into account), and questions whether it is proportionate. At present, the main advantages enjoyed by employees in return for their higher contributions are access to Statutory Maternity Pay, etc, and the ability to accrue an Additional Pension – and that second advantage will be lost when the Single Tier Pension is launched in April 2016.

Apart from the simple question of equity – that the scheme is after all a National Insurance scheme, so the contributions should be proportionate to the unemployment, sickness and pension benefits bought – the SSAC puts forward four reasons for recommending the Government to review the contribution rules. First, the proportion of self-employed people in the national workforce is increasing – from 12 per cent in 2000 to 15 per cent at the beginning of 2014.  Accordingly, any under-contribution is growing in significance.  

Second, the range of people now working on a self employed basis is far wider than the ‘small shopkeepers, crofters, fishermen, hawkers and outworkers’ envisaged by the Beveridge Report. One needs to consider, therefore, whether the original assumptions still hold true.

Third, the law which determines whether an individual is employed or self-employed is complex and confusing, leading to what the SSAC terms a ‘permeable boundary between employment and self-employment’, so that people may be genuinely unsure about their own employment status, or that of the people working for them. The Committee recommends that ‘the Government should consider the extent to which it is possible to rationalise the definitions of who is (and who is not) self-employed for the purposes of employment, National MinimumWage, taxation, and Social Security law.’

Fourth, and perhaps most importantly, the disparity in contributions and the ‘permeable boundary’ have both encouraged and facilitated a growth in ‘false self-employment’.  Although the motivation is usually to reduce the National Insurance contributions payable, ‘false self-employment’ has other adverse effects, such as denying access to much of the employment protection legislation.

Looking forward to Universal Credit

The document also expresses concern about the proposed treatment of self-employed people under Universal Credit. It highlights the onerous nature of the monthly income reporting requirement, the confusing differences between the Universal Credit and Self Assessment rules for calculating earnings, and the disallowance of vehicle purchase costs, even where (as in the case of a taxi) the vehicle is the business.

Childcare Grant Scheme Extended

The Childcare Business Grant Scheme (which is available only in England) has been extended to 31 December 2014. Under the scheme, grants of £250 or £500 are paid to people setting up a new childcare business (which can include childminding in the childminder’s own home). The grant can be used as a contribution towards costs such as training and registration, Disclosure and Barring Service (DBS) clearance, health checks and certificates, and public liability insurance, as well as purchasing equipment and adapting premises.

The grant for a new childminding business (one looking after a child or children, not related to the childminder, in the childminder’s own home) is £250, doubled to £500 if either there are four or more childminders working on the premises (including the proprietor) or the childminder has incurred additional expenditure in order to provide care for disabled children.

The grant for childcare businesses operating in non-domestic premises, such as nurseries and out-of-school clubs, is £500.  The scheme also includes access (free of charge) to a business mentor.

Two points to watch are that grants will not be paid to anyone already operating a childcare business of any kind, even if the money is needed to open a new nursery in new premises, and that schools may not claim a grant for breakfast clubs, after school clubs, and other childcare provided by the school on school premises.

Further information is posted at www.childcarebusinessgrants.dcms.gov.uk.

October 2014 Newsletter

Welcome to the October 2014 Newsletter from Easterbrook Eaton Limited

The referendum on Scottish independence may have resulted in a 'No' vote, but with all the major political parties promising legislation on greater devolution, a constitutional debate affecting all parts of the UK is only just beginning. Here's our round-up of the latest tax and business developments…

Business reacts to Scottish 'No' vote and promise of devolution

The immediate reaction of the British business community to last week's rejection of Scottish independence was 'a collective sigh of relief', according to CBI Director-General John Cridland, who claimed that 'business has always believed that the Union is best for creating jobs, raising growth and improving living standards.'

The CBI's president, meanwhile, went further, suggesting that the two-year national debate in Scotland had delayed investment and 'damaged the image' of British business abroad. Sir Mike Rake, who lobbied for a No vote during the referendum campaign, said: 'There's no doubt that whilst investment north of the border has continued, some has been slowed or delayed… But this is the first positive step towards sanity being restored, towards thinking that the UK is open for business once more'.

The immediate aftermath of the No result saw the pound sterling hit a two-year high against the Euro, after several weeks in which it had fallen amidst fears that Scotland would vote to exit the Union. The FTSE 100 share index also rose, while banking group RBS confirmed that the outcome meant that it would not be moving its registered head office to England.

Pro-independence group Business for Scotland said that it was 'disappointed that the opportunity to improve Scotland through independence has been lost' but that it would 'do what we can to improve things as much as possible'.

Attention now turns to the prospect of further devolution for Scotland and the implications for the rest of the UK, particularly in regards to the ability of the Scottish Parliament to set its own tax rates. Existing agreements between Holyrood and Westminster mean from next year the Scottish government will be able to borrow up to £2.2 billion for capital spending and will be given control over stamp duty land tax, while from April 2016 it will have more powers to set income tax.

Experts have warned that divergence between tax rates within different parts of the UK will lead to tax and jobs 'arbitrage', as businesses could move between regions depending on such factors as local rates of corporation tax or minimum wage levels. 

High net worth individuals would also be keeping a close eye on income tax rates. There are estimated to be some 18,000 higher rate taxpayers based in Scotland, compared with around 200,000 in London and the South East. Scottish high earners could easily move south of the border if taxes were significantly raised, while lowering taxes to be attractive to wealthy individuals could have the opposite effect.

Scott Corfe, head of macroeconomics at the Centre for Economics and Business Research, took a positive view of the possibility, saying:  'There would be competition to attract talent and entrepreneurs into the different regions. Some regions might want to copy what's been done in Ireland where you've got a low rate of corporation tax to attract companies. In the long term, there could be some real benefits from having that'.

RTI relaxation extended

HMRC has announced that it will exempt employers with fewer than 50 staff from Real Time Information (RTI) late filing penalties until 6 March 2015. Until that date, they will be allowed to submit PAYE information monthly.

RTI requires employers to provide information about tax and National Insurance deductions every time they pay an employee rather than annually. The original deadline for implementation by small firms was in 6 October this year.

The relaxation for small firms is the latest in a series of deadline moves since RTI was rolled out in October 2013.

HMRC's Ruth Owen said: 'We know that those who have had most difficulty adjusting to real-time reporting have been small businesses, so this staged approach means they have a little more time to comply with the new arrangements before facing a penalty'.

Employers with 50 staff or more will still be fined if they file PAYE returns late after the 6 October deadline.

Further information is available on our website.

Chancellor announces new tax regime for inherited pensions

In his speech at the Conservative Party Conference last month George Osborne, the Chancellor of the Exchequer, noted that, even following his reform of the tax regime for pensions announced in this year’s Budget, ‘there are still rules that say you can’t pass on to the next generation any of your pension pot when you die, without paying a punitive 55% of it in tax.’  He went on to say that: ‘I could choose to cut this tax rate. Instead, I choose to abolish it altogether. People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free. 

Effective from 29 September 2014. The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down. Freedom for people’s pensions. A pension tax abolished. Passing on your pension tax free.’

Briefing notes were published by HM Treasury the same day. These stated that the new regime will apply ‘from April 2015.’ Possibly this can be reconciled with the Chancellor’s announcement by assuming that the new arrangements will apply where the individual dies on or after 29 September 2014 and the payment is made on or after 6 April 2015.

The Treasury notes indicate that, ‘from next year’, anyone in a drawdown arrangement or with uncrystallised pension funds will be able to nominate a beneficiary to inherit his pension savings.

If he then dies before attaining age 75, the beneficiary ‘will pay no tax on the money they withdraw from that pension, whether it is taken as a single lump sum, or accessed through drawdown.’

However, if he dies after attaining age 75, drawdown payments will be taxed as the beneficiary’s income. Lump sum payments will be taxed at 45% in 2015/16, but thereafter at the beneficiary’s marginal rate. This delay is to allow time for details of a tax deduction scheme to be worked out with pension providers.

Neither the Chancellor’s statement nor the Treasury briefing notes mention the Inheritance Tax position.