Getting tax on consulting right is about working out how to tax what actually happens – which no existing solution can deliver

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It would seem that The Times is being used by HM Treasury on a quite regular basis now for kite flying tax reforms. The latest is implicit in the article linked in thus tweet from Paul Lewis:

This is something I have been writing about since the 1980s, and on this blog about since 2007. A relatively recent discussion gave rise to a succession of attacks suggesting I was wrong to suggest there was an advantage for those being paid by dividends, but it is absurd to claim otherwise. The IFS (acting comfortably within their micro territory here) offer a surprisingly large estimate of the tax lost.

The real question is whether much will be done to address this? The link noted above suggests a remedy I suggested that certainly appealed to the Treasury when it was written, because I was told that they took it seriously back then. However, events overtook matters and the recovery from the economic crisis of 2008 prevented action at that time. The fear of forcing contractors out of work when the economy was vulnerable was too great.

I  strongly suspect that nothing will happen on this issue in March for the same reason. Simply, the economy is too vulnerable for such a reform right now. That there would be a backlash would be a fact compounded by the fact that many who ran companies in this way have been denied access to  almost any of the Covid support schemes if unable to work. Reform would add insult to their already perceived injury. The consequence is that the risk of an embarrassing climb down if reform was announced would be very high.

But, as with wealth taxation, I think that the chance of a consultation beginning is high. There is a long running imbalance here that needs to be addressed.

However,I do not believe that the problem is solved by shoe-horning the consultant into conventional employment or PAYE employment in their own company. Subject to a genuine consultancy existing those engaged in this activity are not employees. But nor too, come to that, are they people who deserve to be taxed as if making a return to capital, which is what happens in their own companies.

There is a difference in the economic risk that a genuine consultant takes when compared to an employee and it would be absurd to pretend otherwise. Reform has to reflect economic reality and ensure that it is taxed fairly, I still think my 2007 proposal has merit. What is certain is that without genuine innovation this problem will not be solved.