THE ABOLITION OF CLASS 2 NATIONAL INSURANCE: INTRODUCING A BENEFIT TEST INTO CLASS 4 NATIONAL INSURANCE FOR THE SELF-EMPLOYED

Transcription

1 THE ABOLITION OF CLASS 2 NATIONAL INSURANCE: INTRODUCING A BENEFIT TEST INTO CLASS 4 NATIONAL INSURANCE FOR THE SELF-EMPLOYED Response by the Association of Taxation Technicians 1 Introduction 1.1 The Association of Taxation Technicians (ATT) is pleased to have the opportunity to respond to the consultation document The abolition of Class 2 National Insurance: Introducing a benefit test into Class 4 National Insurance for the self-employed ( the Consultation ) published jointly by H M Treasury (HMT), Department for Work & Pensions (DWP) and HM Revenue and Customs (HMRC) on 11 December We will provide responses to the consultation questions at section 2 below. However, we first set out our overall comments on the proposals. 1.3 Whilst we applaud the intentions of Government to simplify the National Insurance ( NI ) position for the self-employed by abolishing Class 2 NIC, and attempting to mirror the Class 1 system, we are concerned with the proposal that any self-employed worker with profits below the Small Profits Threshold ( SPT ) will not be covered by the zero-rate band for Class 4 NIC, in terms of protecting their benefit entitlement. 1.4 Currently, if a self-employed worker has earnings below the SPT, they can still elect to make Class 2 NIC contributions anyway and, importantly, they can do this through the Self-Assessment tax return. 1.5 Under the proposals, not only will self-employed workers with profits below the SPT and no Class 1 credits have to make much higher NI contributions under Class 3 in order to maintain their entitlement to state pension and benefits, it also appears from the Consultation document that they will be denied any facility to make voluntary Class 3 contributions through the Self- Assessment tax return. Instead, they will have to make a separate application to make those contributions. Coupled with the higher cost, this additional administrative burden will increase the likelihood that self-employed workers affected by these changes will choose not to make Class 3 NIC payments and will therefore build up inadequate provision for their retirement. These individuals will then be more reliant on the state for assistance. Creating such barriers for lower earners and discouraging them from protecting their benefit entitlement cannot be a positive move. Registered in England and Wales Registered Office: 1st Floor, Artillery House, Artillery Row, London SW1P 1RT A company limited by guarantee: Number Registered as a charity: Number VAT Registration: Number

2 1.6 We would urge the Government to reconsider this proposal and establish a different Class 4 NIC structure (to the one proposed in Figure 2.B) as it does seem nonsensical that someone with, say, 6,000 annual profits would not have to pay any Class 4 NIC and would be completely protected in terms of their benefit entitlement, yet another person with, say, 5,000 annual profits (or even a loss) would have to pay per week in Class 3 NIC to protect their benefit entitlement. 1.7 We do not believe that self-employed workers with earnings under the SPT should become an acceptable casualty of a move to a simpler system. Whilst alignment with the Class 1 system might be the aim, HMRC, DWP and HMT need to recognise that the way a self-employed worker and an employee earns their qualifying income for NI purposes is not the same. For instance, a selfemployed worker could be placed in the position that in order to buy the equipment he needs for his business, he faces wiping out his NICable profit and therefore having a year that does not qualify for benefits unless he makes much higher voluntary Class 3 payments. It cannot be right that this proposal should have the effect of influencing business decisions because of concerns over protecting benefit entitlement. Class 1 earners certainly do not face this quandary. 2 Our responses to the questions 2.1 Question one: Do you think that the Government should seek to maintain the existing level of access to contributory benefits? If so, how do you think this should be achieved? Yes, we believe this should be maintained. With that in mind, our concerns voiced in sections are in point, as the level of access to contributory benefits under the new proposals for selfemployed people with profits below the SPT is likely to get worse. 2.2 Question two: This chapter (chapter two of the Consultation) explains the Government s proposed approach a profits test at the Small Profits Threshold in Class 4 NICS and how this could work for self-employed people with profits above the Small Profits Threshold to determine the entitlement to the State Pension, Bereavement Benefit and contributory Employment and Support Allowance. Noting the difference between this and the existing benefit entitlement rules (set out in Annex C of the Consultation), what are your views on this general approach? It does make sense to align the SPT with the Lower Earnings Limit (LEL) under Class 1 NIC. However, as regards the Government s proposed approach, please refer to our comments at sections and section Question three: What are your views on the proposed contributory tests in Table 2.A? Can you suggest any alternative contributory tests based on annual profits for: a. State Pension? b. Bereavement Support Payment? C. Employment and Support Allowance? We have no comments to make here. 2.4 Question four: To what extent do you think that people and self-employed people in particular are sufficiently aware of the existing provisions in the NICs system that currently protect P/ATTTSG/Submissions/2016 2

3 entitlement to the State Pension and Bereavement Benefits, namely NI credits and Class 3 voluntary NICS? We believe that self-employed people are not very aware about NI credits and, in particular, Class 3 voluntary NICs. The self-employed have never really needed to be aware of Class 3 NIC as they have always had the ability to pay Class 2 voluntarily even if profits are below the SPT. Indeed, our members deal with the tax affairs of many self-employed clients who have consciously chosen not to claim the small profits exemption, precisely in order to protect their benefit entitlements. Having to pay Class 3 NIC and follow a separate procedure for doing so (rather than making payments in the usual way that they have always done) is going to require an education process. As we have indicated in section 1.5 of this submission, we can envisage many self-employed people, especially those with fluctuating profits who may fall into and out of the new structure, will simply deem it too much effort to check their NI record to decide whether to make voluntary payments or not. They will certainly not see these proposals as a simplification when it makes life more burdensome for them. 2.5 Question five: Do you agree that the Government should align voluntary contributions (ie by making Class 3 the only voluntary NICs payment) for the new State Pension for employees and the self-employed? Please give reasons. As already mentioned in this submission, aside from our concerns about the substantial increase in cost for self-employed workers on low profits in having to pay voluntary Class 3 NIC, we believe that any voluntary payments should be capable of being made via the Self-Assessment tax return (or via the replacement digital accounts) rather than forcing the individual to have to go through an entirely separate process, which we believe many will fail to do either through lack of knowledge or unwillingness to have to go through another procedure. The Government should be making it as easy as possible for people to make voluntary contributions and this requires both publicity and ease of access to making the contributions. The development of the digital accounts would seem like an opportunity to build in the functionality for individuals to be able to check their NI records and if necessary, make additional voluntary payments. 2.6 Question six: Do you think the Government should continue to enable individuals who have not made a contribution via sufficient self-employed profits to access: a. Bereavement Support Payments? b. Contributory Employment and Support Allowance? Yes. 2.7 Question seven: Do you agree that the Government should consider facilitating this access through Class 3 voluntary contributions? We agree that there always ought to be the ability to make voluntary contributions to enable access to such benefits, but we remain concerned about the change for those with low profits and do not see why it is necessary that they should have to pay Class 3 NIC. We see no reason why the Class 4 zero-rate band, which will protect benefit entitlement, should not start at zero profits. P/ATTTSG/Submissions/2016 3

4 We believe that the zero-profits entry point could also have the benefit of encouraging low earning self-employed workers to register their self-employed activities with HMRC. 2.8 Question eight: Do you have any comments on the approaches proposed for Maternity Allowance in this chapter? Do you have any preferences for an approach based on: a. A profits test with optional payment of Class 3 NICS during the 13 week test period (to protect those with low profits or who have no recent profits) b. Estimated earnings during the 13 week test period c. (for participating spouses only) The conditions of the existing employment test only. We have no comments to make here. 2.9 Question nine: Can you suggest any alternatives? No Question ten: Do you have any comments on the proposals to provide for individuals moving into and out of self-employment within the tax year, who may be less able to achieve annual profits at the Small Profits Threshold? We would welcome the ability to pro-rata the self-employment profits into weeks for those individuals who move from employment to self-employment (or vice versa) during a tax year, so that weekly profits at or more than the LEL (which is to be aligned with the SPT) would confer benefit entitlement for those weeks Question eleven: For the following groups: Share Fishermen Volunteer Development Workers We believe that all self-employed people should be treated the same under the new system. So, whilst we accept the removal of the special rules that currently exist for the above cases, we strongly believe that the ability to be covered by the zero-rate band for Class 4 NIC (and therefore have benefit entitlement protected) should apply even if the profits fall below the SPT Question twelve: For the following groups: Self-employed abroad Employed abroad Mariners on foreign flagged ships Please see our response to question eleven, section 2.11 P/ATTTSG/Submissions/2016 4

5 2.13 Question thirteen: For the following groups: Examiners Ministers of Religion Foster Carers Some landlords Self-employed women with a reduced rate election Please see our response to question eleven, section Contact details 3.1 Should you wish to discuss any aspect of these comments, please contact our relevant Technical Officer, Alison Ward, on or at award@att.org.uk. Yours sincerely Yvette Nunn Co Chair of ATT Technical Steering Group 4 Note 4.1 The Association is a charity and the leading professional body for those providing UK tax compliance services. Our primary charitable objective is to promote education and the study of tax administration and practice. One of our key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Drawing on our members' practical experience and knowledge, we contribute to consultations on the development of the UK tax system and seek to ensure that, for the general public, it is workable and as fair as possible. Our members are qualified by examination and practical experience. They commit to the highest standards of professional conduct and ensure that their tax knowledge is constantly kept up to date. Members may be found in private practice, commerce and industry, government and academia. The Association has over 7,900 members and Fellows together with over 5,800 students. Members and Fellows use the practising title of 'Taxation Technician' or Taxation Technician (Fellow) and the designatory letters 'ATT' and 'ATT (Fellow)' respectively. P/ATTTSG/Submissions/2016 5