There will be no economic theories from me after those two contributions.
“Rumours have it that the Chancellor will use his Budget tomorrow to raise Class 4 NICs for the self-employed—a sensible move that could strengthen self-employment in the long run. But he risks a backlash unless he commits his proposals to meaningful consultation. Tax reform without popular support is always short lived”.
The article advanced arguments both for and against NICs reform. It continued:
“Legitimacy first, reform second … The Treasury, lobby groups and think-tanks can do all the number crunching they like, and make the most compelling technical case for reform. But if they are only talking to themselves … then there is little hope for meaningful change … All of this points to the need for a thorough consultation on NICs reform before any changes are made … And if not? Then the Chancellor may face his very own ‘pasty tax’ moment”.
Curiously, the article made no mention of the manifesto pledge, which in the event proved to be the major obstacle to the Chancellor’s intended change—that and perhaps the “no-go area” referred to by noble Lord, Lord Macpherson, who probably has more experience of “pasty tax” moments than any man alive. The triple lock pledge made by Cameron was unwise and the circumstances have been transformed by the result of the referendum, but a pledge it was, and the case needed to be made for breaking it. The problem facing the Chancellor was well illustrated by two articles in the Daily Telegraph after the Budget. The first accused him of not doing anything like enough to reduce taxes and the second, two pages later, said that not nearly enough had been done to reduce the nation’s borrowing and debt. The Minister emphasised the need for caution and fiscal responsibility, pointing to the 60% of self-employed people who will pay less tax.
The Chancellor was right to make provision for a period of uncertainty, now made worse by the demand for a Scottish referendum. Those seeking a way out of the NIC mess could do worse than study The Entrepreneurial Audit, a report published in February by the RSA after months of evidence-taking and consultation. The report makes two sensible points at the outset. First, the Government should be guided by evidence, including direct consultation with the self-employed. Secondly, they should aim for policy continuity, as unnecessary change can create confusion and disruption. The report recognises the diversity of 4.8 million individuals; not all of the self-employed share the same expectations and needs, or live up to the stereotype of the heroic entrepreneur. I thought that the noble Lord, Lord Desai, was more accurate on that matter than my noble friend Lord Flight, whose remarks I criticised to his face outside the Chamber.
The report argues that its foremost concern is that people doing the same work but under different guises can face widely different tax treatment, and that creates three core problems. The first is the incentive it creates for false self-employment. Employers who treat individuals as self-employed contractors when they should be engaged as standard employees make considerable savings, while the workers lose valuable rights. The second is that the differential makes it hard to argue that the self-employed should have greater welfare protection. The third problem is the large sums lost to the Exchequer, particularly from the growth of gig work, enabled by platforms such as Uber.
The report makes numerous recommendations. What is important is that, although one might not agree with many of them, they are all set in the context of the need for other changes, notably the modernisation of business rates and changes to policy on welfare and pensions, regulation, late payments and universal credit. The report identifies flaws in universal credit as it applies to the self-employed and recommends that they be ironed out to ensure that it is fair for the self-employed and employees, and does not hinder potential viable businesses.
I finish with pensions and the need for continuity of policy. The reversal of policy on the dividend allowance was violent. The Minister defended it by saying that 80% of those receiving dividends would pay no tax on them, but one in five of the 2.3 million people who will pay are pensioners. I suppose that I should declare another interest because, although I have always invested the maximum in ISAs, I might have to pay a little more myself. Those pensioners have really been sold a false prospectus.
I draw one positive conclusion from reading the report: there are plenty of routes available to the Government for making workable and acceptable changes to the tax arrangements for NICs and remove them from the list of no-go areas, while, in this time of uncertainty, protecting as they must the revenue stream. A mistake has been made, but I hope that the squabbling will now cease and solutions are found in time for the Autumn Budget.