Posted: Mon 6th Feb 2017
Britain's tax system means the self-employed and business owners have an unfair advantage over employees, a new report claims.
In a study that is likely to cause anger among entrepreneurs, the Institute of Fiscal Studies (IFS) says the tax system is "much less favourable to the 85% in employment than it is for the 15% who work for themselves".
Describing it as "costly, inefficient and unfair" and concluding that "the difficulty and risk associated with entrepreneurship do not in themselves justify favourable tax treatment", the IFS suggests the following:
For those earning Â£15,000 (employer cost), tax on employees is Â£631 a year higher than if the income was earned by a self employed person and Â£818 higher than if earned by a company owner manager
At Â£40,000 the differences are Â£3,442 and Â£4,502 respectively
At Â£100,000 the differences are Â£7,365 and Â£8,035 respectively
The group says giving lower taxes to individuals who work for themselves is costly with Office for Budget Responsibility estimating that the growth in small companies will cost the Exchequer an additional Â£3.5bn in 2021-22.
It is inefficient, IFS continues, because the tax system encourages people to register themselves as a company rather than work as an employee, and it is unfair because two people earning the same amount for doing similar work can pay different amounts of tax.
In other criticisms, the report says because employees have more rights such as minimum wages, sick pay and holiday pay, it makes it less attractive for companies to employ people as opposed to hiring a self-employed contractor as shown by the popularity of the 'gig economy' with services such as Uber and Deliveroo employing workers on a self-employed basis.
Company owners can also get lower tax rates, IFS complains, by taking income out of a company in the form of more lightly taxed dividends rather than wages.
Helen Miller, IFS associate director, said: "There's a lot of very woolly thinking about how we should tax the self-employed and company owner managers relative to employees. The differences in entitlement to state benefits are now far too small to justify the lower rates given to the self-employed.
"And lower rates are not a good way to incentivise entrepreneurship. Changes in working patterns, including those related to the gig economy, make tackling current differences all the more important both to protect the public purse and to avoid giving incentives for big companies to treat people as self employed rather than as employees."
What do you think? As a self-employed individual or small business owner, do you have an unfair advantage over employees? Or does the effort you put in to building your business justify lower taxes? Or do you feel the tax system isn't actually in your favour? Comment below.