Simplify employment tax to kick-start recruitment

October 15, 2009

David Ellis-David Ellis is partner and head of human capital at BDO LLP. He specialises in the development of tax efficient, performance driven long term incentive plans for senior employees. The opinions expressed are his own.-

There’s no doubt about it, the UK’s complex employment tax regime is a major barrier for businesses to attracting talent. For our new report, launched today, we spoke to 126 financial decision-makers and we found that 34 per cent would be more likely to employ additional staff if taxes were reduced or reformed.

At present, onerous regulation is the fly in the ointment for recession-hit firms. On average, five individuals in each company are spending 5.6 days a month administering employment tax schemes.

These schemes also impact cash flow, which makes the prospect of the extra expense of new staff unfeasible. That’s why 1 in 3 of those surveyed felt that a simpler scheme would improve cash flow and allow manpower to be reallocated to such activities as new business.

Our research found that employment taxes are such a serious issue for businesses that 70 per cent say employment tax policies would affect which political party they would vote for in the next election.

So how can the complex world of employment taxes be untangled? Research shows that 88 per cent of businesses agree with our suggested solution for simplifying the Pay as You Earn and National Insurance Contributions system. We want to see the two merged so that there is just one tax on personal income. This would remove the need for different allowances, rate bands and filing dates.

Another problem is the complexity of HMRC rules holding businesses back from offering benefits to employees, including share-based incentive schemes. Some 55 per cent of firms offered no such scheme, even though they recognise that they attract and retain talent and incentivise staff to perform.

Our vision would be to remove all current HMRC approved or registered schemes and replace them with one arrangement, under which share options could be offered to any employee, on any terms, and at any price. As our survey showed, such schemes would encourage a third more businesses to consider offering share schemes to staff.

Some form of harmonisation and simplification has been talked about for many years. The Government should enter a brave new world, stop talking and act.


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I have always thought a simple percentage in bands is surely the best way. Do away with all allowances and reduce average tax rates accordingly. I am sure the cost of collecing all taxes, working out allowances etc adds a few percentage points to what we all pay. While we’re at it, let’s get rid of car tax, fuel tax and every other tax on goods and simply have different VAT bands for different goods. My god, is it really so difficult.

Posted by Russell | Report as abusive

I’ve only recently started to think about national insurance as I have reached a level where I am fortunate enough to earn a reasonable salary. Do I get value for money from what I contribute. Sadly the answer seems to be no. Its a meaningless tax on income and has no correlation to what I receive in return. Lets scrap it and not pretend that it goes towards a better health service or any other “public service”

Posted by Tilly | Report as abusive

The 5 year objective for the incoming government should include:

– Abolish Employers National Insurance, do away with this tax on jobs and reduce Corporation Tax
– Raise the VAT threshold to at least £500,000 and take tens of thousands of businesses out of scope (and cut costs in HMRC accordingly, a double benefit)
– Raise the personal (tax) allowence to around £25,000 and maintain it at average earnings with the objective that the average person doesn’t pay tax (again, reducing the costs of HMRC). Personal allowences should be retained; they encourages work and reduce the need for Gordon’s beloved Tax Credits; but keep them simple.

How should this be funded? Raise VAT, perhaps to 25% or more over a five year period and watch the tax revenue roll in as entrepreneurs suddenly find that Britain is a place they can do business again

Posted by Jeremy | Report as abusive

The country needs economic stimulus. Should the debate not therefore be about whether we merge tax and NI but about how we put more £’s in peoples pockets. Suggestions from previous commentary (Jeremy) would, I think, get massive support. Have any of the parties got the courage to suggest it?

Posted by Michael | Report as abusive

Yes, I agree with merging income tax and Nat. Ins.
A) Simplifies employers work.
B) You could then half the HM Revenue and Customs employees at a stroke.
C) It would save having to introduce a 50% tax band, the ceiling on the NI contributions would be removed.
Road tax – yes, remove it, but increase the fuel price by 10p to replace it, that way gas guzzlers get taxed for gas guzzling, not for having a large capacity car in a garage. At a stroke there would be no more un-taxed cars breaking a barely enforceable regulations. It would even give the government some green credentials. Drivers would think twice before driving to the local shops, etc.

Posted by Mike | Report as abusive

It is not only tax rules that make small businesses reluctant to employ people. Employers are in a one legged buttock kicking competition.

Before I go on, this is NOT an attack on anyone other than a government that does not understand how business works. Notwithstanding the economic mess that the country is in, it keeps on saying that banks should lend more to business but does not understand that a lot of businesses do not want to borrow more money. Why? Well for a start business is hamstrung by legislation and lots of it and I am sure that someone else can spell out these restrictions better than me.

No one in government seems to understand being an employer is difficult. Not allowed to ask a woman if she is planning a family (this is something that can be worked around if both sides know what is going on), can’t just get rid of someone if they are useless, can’t say anything to anyone in case they decide that “they do not like the way that they are spoken to” and go for constructive dismissal. But it is OK for 1000’s of small businesses owners to risk their homes with mortgages & take loans in their own names to create jobs.

Rant over.

Posted by Jonathan | Report as abusive

Fundamentally flawed.

Basic computation of income tax and NHI is computerised in any substantial business & can be in the smallest – if not agencies will do it.

Yes it’s a pain – but simplification won’t help a lot.

“Freed up” accounting staff won’t go on sales missions nor perform production tasks either.

Re employment law – if people were treated as adults responsible for their own actions – as in being self-employed and contracting to do work at the prevailing rate in the market – we’d end this stupidity of ‘maternity & paternity leave’ and the benefits culture (and gold-plated public sector pensions too) and allow businesses with work to do to hire when they’re busy and lay off – or reduce labour costs – when they’re not.

Then they would hire additional labour when they’ve work to do instead of paying overtime or deferring the project per now, as they are currently ‘stuck with’ anyone extra they take on – and could acquire a 12 month maternity liability without getting any work from an employee at all.

The Chinese won’t pay twice the price for a British product (over an alternative) just because the British worker enjoys maternity leave, 6 weeks holiday, free schooling and state-funded health-care; the Chinese consumer doesn’t care.

Time to wake up – the world does not owe the British people a living – and those companies competing to export in world markets are the ONLY ones that increase this country’s net store of wealth that we all want to share.

They need all the help they can get – not the 10 ton handicap of carrying “the welfare state”.

Posted by john upex | Report as abusive