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Tax after Covid: Treasury Committee calls for the 'three person problem' to end – be aware

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Taxes are believed by many to be what Rishi Sunak will target in the coming months to recoup coronavirus spending. This could arrive from many angles such as pension tax reform, the introduction of a wealth tax or simply the raising of existing tax rates.

The report called for reforms of a number of tax obligations such as stamp duty and pensions relief but they also urged the state to address a specific problem affecting the self-employed.

The Committee singled out the problem of addressing different forms of work which can lead to multiple taxation, as they detailed: “We strongly believe that a major reform of the tax treatment of the self-employed and employees is long overdue. The current system is confused, unfair and unsustainable.

“The review should incorporate the benefits which accrue upon payment of NICs and other taxes as well as the level, the incentives and the interaction of such taxes. It should look as far as is possible to eliminate the so-called ‘three person problem’ altogether.”

To briefly summarize, the three person problem means it’s possible to work for the same employer and be taxed in different ways depending on if the person is employed, self-employed or is operating through a limited company.

However, while some may be welcoming of these calls, Dave Chaplin, the CEO of contracting authority ContractorCalculator and IR35 Shield, was critical of the overall inaction on this (it should be noted this was the Treasury Committee’s 12th report on tax after coronavirus).

Dave doubted any action would be taken: “This is yet another report that calls for a review on examining how the self-employed are taxed. We’ve had so many of these in the last decade, one loses count. A call for a review is a way to kick something into the long grass and reminds me of a scene in Monty Python’s Life of Brian where one of them says ‘Right, this calls for immediate discussion’.

“The same old arguments and problems get raised, and commentators, including myself, all preach from their own academic or professional bubbles, which fail to take into account the entire picture.

“This is a hard problem, and any solution will create considerable distortion with winners and losers. Because of the short five year Parliaments, no Government ever wants to be brave enough to make the changes required, because it’s a sure fire election loser.

“In my view, central to any change needs to be cast iron tax certainty for firms, otherwise they won’t site themselves in the UK.”

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