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Matthew Taylor: We must debate the sustainability of business rates as a revenue source

Matthew Taylor
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I will spend much of the festive season trying to understand our arcane system of employment rules and work-related tax regulations, not to mention considering the views of everyone from employers organisations to people who want to know why they earn so much less than the minimum wage.

Had I known quite how complex it all is I might have been more hesitant when Number Ten asked me to chair the Review of Modern Employment set up by Theresa May. Yet, while I might have predicted the review would force me to get my head round the detail, more surprising is having to stand back to see the bigger fiscal picture.

The conversation about ‘non-standard’ forms of labour such as gig working, agency staff and contracting tends to focus on fairness and exploitation. It is clear that some treat people like workers but try to avoid meeting the obligations that go with being an employer. This behaviour is not just driven by employment regulations; the National Insurance system also provides a powerful disincentive to employing people directly.

Markets work best when those trading compete on a level playing field. In many markets margins are tight and competition is fierce. That employers have to pay a 13.8% National Insurance rate on top of pay can make a huge impact. With the costs of meeting employment rights as well it is not surprising many businesses engage labour without employing workers. But the issue is not just about businesses and workers; it is about perhaps the toughest public policy question of all: how do we pay for public services at a time of rising needs?

Imagine Fred and Freda, who are both IT engineers: Fred is employed by the RSA while Freda does the same work and receives the same remuneration but as a self-employed consultant. Assuming Fred and Freda both earn at about average salary levels, the exchequer receives roughly £3,000 more in employer and employee tax per year from Fred as from Freda. If Freda has incorporated herself as a business and pays herself out of ‘profits’ the difference in tax take is even bigger.

With self-employment and sole trader incorporation rising and employment tax revenues falling it is hardly surprising the chancellor and the Office for Budget Responsibility raised the question of the reliance of our tax base in the autumn statement. Although my review hasn’t been asked to make recommendations about tax, it is clear that bogus self-employment and other forms of creative accounting are unlikely to go away with such strong incentives in play.

The conversation we need to have about tax goes even wider. I recently spoke to the thoughtful head a leading high street retailer. He said the largest category of tax he pays is the business rate, followed by employment taxes, with corporation tax a distant third. “If three quarters of our tax burden is for property and people, how are we supposed to compete with online retailers who have no shops and employ a comparatively small workforce?” he asked. Some will say this is progress and a better deal for consumers, but do we want the downsides? Towns need vibrant centres, which need shops and people with jobs to shop in them. Those same people need the public services that rely on tax revenues.

There have been many attempts to look at our tax system from first principles and ask about its fitness for the future; the 2011 Mirlees Review was perhaps the most comprehensive. But until now political will for reform has been lacking. Our leaders weren’t convinced the present system couldn’t be patched up. Despite low productivity they stuck to increasingly questionable assumptions about what is good for business and the economy. The impact of tax reforms are quietly accepted by those who gain and noisily opposed by those who lose, even when the latter numerically outweigh the former.

Local government is going through its own fiscal revolution as it prepares for keeping business rates and losing central support grant. But there are questions about whether business rates are a sustainable revenue source as more and more activity goes online. This debate is likely to grow and there is a case for local government taking the lead. We need to develop a resilient tax framework that could gain cross-party support and treat local tax-raising as an integral part of a balanced system, not just as an afterthought. It would be bold for councils to step out of their usual subservient role to drive a debate about national strategy, but boldness is just what we need.

Matthew Taylor, chief executive, RSA

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