It's an elephant, and it's probably in a room. I thought it was cuter than the real thing, though.
About ten days ago, we learned that the Conservatives were thinking of scrapping the PAYE system. Tax will be deducted via the banking system, it seems, relieving employers of having to act as unpaid tax collectors. The PAYE system is under strain from the number of people who change jobs more regularly, and have multiple sources of income, all combined with the general complexity of the tax system these days.
I can only assume that the policy is at an “embryonic stage”, as details were thin on the ground. Nevertheless, it is worth testing just how radical or effective such a policy would actually be, even though the objective of reducing burdens on business is a sound one.
Let’s start with the employer’s position. Obviously an employer will still have to calculate the amount of pay due for the month or week. Those records will still have to kept as part of his/her proper accounting records, as well as to satisfy various employment regulations. If an occupational pension scheme is in place, a staff loan, or attachment of earnings order for example, then those deductions will still have to be calculated and recorded. What of statutory payments such as Statutory Maternity Pay, which is based on earnings levels, and the compensation that is reimbursed to the employer? Such amounts will still have to be accounted for and recorded. Shall I mention the taxation of benefits in kind, such as company cars or medical insurance?
Then let us not forget Employer’s National Insurance – the tax on jobs. How would this be accounted for and paid over without a payroll system looking pretty similar to those of today? Add into the mix the number of employers these days who use computerised payroll systems – even if it’s the software that HM Revenue & Customs (HMRC) provides – and the question is how much administrative burden will actually be removed from businesses by this move?
How Would It Work?
Moving on, the next issue is who will operate the tax deduction system if not the employers? One possibility would be that the banks make the deductions, either themselves or via the clearing system. After all, they already deduct tax from certain payments, such as interest (which for most people is a flat rate deduction, so there’s not much to calculate). Sometimes they get it right, too. This will still require something resembling a PAYE coding system, though, so the problems around multiple incomes, and the general inefficiency of the system, remain. So there’s not a great deal of advantage, other than that administrative burden (such as it is) being transferred to the banks, which means we will all end up paying for it, though it may bring some relief for small businesses (even if it’s not a lot, as I’ve already pointed out).
Another method would be for HMRC to have direct access to people’s bank transaction details and take it upon themselves to decide what is genuine taxable income, as opposed to mere fund movements, gifts, income already deemed net of tax (e.g. dividends at the basic rate), exempt income (legitimate expenses, say) or some other sum that is frankly none of the government’s flipping business. They then deduct the relevant amount of tax and NI (if applicable). The pass may have been sold, some would point out, with HMRC’s existing powers, but there’s no need to “go the whole hog”.
Then, even if all these factors are reconciled, what about those paid in cash? Yes, there are still quite a few who are paid in readies, and why shouldn’t they be?
So, given that simply shifting the tax deduction job away from employers doesn’t achieve the aims, what else can we do to reduce the overall burden, whoever it falls on?
The most effective long-term way to reduce the burden of the state on business is the same whether you’re talking about administrative costs or tax – reduce taxes. Enough said. For the purposes of this article, though, I’ll take that as read and move on.
Employer’s could just deduct tax at a flat rate, such as already happens in the construction industry. This might simplify the actual calculations, but the other functions of a payroll system will remain, and it will just mean more people having to do tax returns to finalise their tax position each year. As an accountant, I would wholeheartedly support such a move!
Some would suggest a flat rate tax. I support a flat rate tax: it is much fairer than so-called “progressive” (more accurately called “penalistic”) taxation which, even if you are an old-fashioned class-warrior, seems to be based on a fundamental misunderstanding of how percentages work (20% of £100,000 is a lot more than 20% of £20,000, so you don’t need to progressively increase the rate for the “better off” to pay more, you socialist morons).
However, though I support it, a flat rate tax will not on its own bring about the simplifications that are sometimes claimed. Issues around deductibility of expenses remain, as could questions over employment status, timing of income, income shifting, and so may other questions that have added to the complexity of the system over the years. Let’s not forget, either, that the most complicated tax is VAT, unaffected by flat rate direct taxation.
More practically, though, there is something that would significantly cut the burden on both business and HMRC: combine tax and National Insurance. I’m sure that HMRC and the Treasury will have a 101 reasons why it wouldn’t work, but let’s face it: the National Insurance Fund is an accounting technicality. Indeed, National Insurance is little more than a Ponzi scheme; if you or I ran a pension scheme, for example, based on the principles of the state pension, we would be put in prison. The contributory principle – your record of NI payments – would survive but the record would be updated as a function of the amount earned or tax paid in any particular year, making it a largely automated process within a significantly slimmed down HMRC, without the need for a separate deduction system.
So go on George – be radical. This is one elephant in the room that won’t frighten (most of) the horses.
Finally, as you may have guessed by now, I am in the accounting profession, so should declare my interest. In fact, I don’t think reducing the payroll administration burden on small businesses wouldn’t have that significant an effect on the profession, so we won’t be marching on Number 10 any time soon.