National Insurance and Self-employed Entertainers Response by the Chartered Institute of Taxation 1 Introduction 1.1 The Chartered Institute of Taxation (CIOT) is pleased to comment on the proposals to simplify the Social Security (Categorisation of Earners) Regulations 1978 (the Regulations ) for self-employed entertainers. 2 Executive summary 2.1 We agree that HMRC s preferred option, to repeal the Regulation in respect of selfemployed entertainers, is the appropriate way forward. Class 1 NIC contributions are essentially intended to apply only for employees; deeming the self-employed to be employed in our view represents a distortion and creates complexity. Taking on board the arguments presented in the consultative document, we conclude that such distortion and complexity is not justified, in principle, as regards self-employed entertainers and, accordingly, that Class 2 and Class 4 NICs should apply to them as they apply to the self-employed generally. 2.2 The consultative document points out that there may be a (relatively modest) cost implication in repealing this Regulation as Class 1 NIC brings in more revenue to HMRC than a combination of Classes 2 and 4. However, we believe that if an individual is properly self-employed then they should nevertheless be subject to income tax and NIC on that basis so that, in the case of self-employed entertainers, the integrity of the NIC system is restored. 2.3 HMRC has analysed the position on entitlement to benefits and concluded that for self-employed entertainers with high amounts of savings or partners who may be working may receive less in terms of benefits when out of work when subject to Class 2 and 4 NIC than when subject to Class 1 NIC. But HMRC also conclude that for those most in need of support, means-tested Universal Credit should provide at least the same level of support as does JSA. Providing this is correct, the most vulnerable would appear to be protected and, accordingly, we consider that the proposed changes should not be detrimental to them. For those with greater means the level of benefit entitlement may fall, but they would be in no different a position as the selfemployed population as a whole. 2.4 The reduction in statutory entitlements for pregnant female entertainers that is
discussed in the Taxes Impact Assessment should be researched further and addressed before the Regulations are repealed. 2.5 We think that HMRC should review the Regulations as a whole to determine whether other categories of self-employed workers should also no longer be deemed to be employed earners for NIC purposes. 3 National Insurance and Self-employed Entertainers 3.1 Deeming an individual to be employed or self-employed for NIC purposes simply creates complexity and confusion. In regard to entertainers this is acknowledged and commented on in detail in Part 3 ( The Issues ) of the consultation document. 3.2 The Regulations have failed to provide a balance between those entertainers who need an entitlement to contributory benefits and respecting the self-employed status of those who do not. 3.3 Consequently, we agree that it is time to review the operation of the Regulations and amend the legislation so as to address the problems that the Regulations are causing. 3.4 Chapter 6 of the consultation document identifies a number of issues and concerns to be addressed and proposes three possible approaches. These are: Do nothing - entertainers retain dual status for Tax and NICs; Simplifying the legislation but maintaining the Class 1 NICs regime; or Moving entertainers earnings into the Class 2 and 4 NICs regimes. Whatever option is chosen it will be difficult to address all of the issues and concerns identified, and some compromises will inevitably need to be made. 3.5 Do nothing entertainers retain dual status for Tax and NICs Question 1: Do you agree that current NICs treatment of entertainers under the Social Security (Categorisation of Earners) Regulations 1978 needs to be changed? We agree that the current NICs rules need changing. Doing nothing is simply not an option (as paragraph 6.3 acknowledges). The Regulations no longer work; the nature of the industry has changed and the Regulations are simply imposing an inappropriate financial and administrative burden on the industry (and HMRC in policing it). 3.6 The difficulties in collecting and enforcing payment of Class 1 NIC, where paid by multiple parties over many years, is commented on in the consultation document and should not be underestimated. It is worth noting that in 1998-99, when the Regulations on entertainers first came into effect, the secondary Class 1 NIC rate was potentially as low as 3% (compared with 13.8% now). 3.7 Simplifying the legislation but maintaining the Class 1 NICs regime Two options for simplifying the legislation are suggested in Chapter 7. These are: Option 1: Provide for separate secondary contributors for NICs due on Initial Performance Payments (IPPs) and NICs due on Additional Use Payments (AUPs); or Option 2: Provide that IPPs are subject to Class 1 NICs, but AUPs are subject P/tech/subsfinal/ET/2013 2
3.8 Option 1 to Class 4 NICs. Option 1 is impractical, for the reasons given in paragraphs 7.14 7.22 of the consultation document; given the preponderance of non-uk payers of AUPs we believe this would impose a significant regulatory burden on the entertainers (for example, the entertainer will have to register as an NIC-only employer and, we assume, will then be required to report payments they have received under Real Time Information). It also alleviates none of the complexity of determining what payments fall within the Regulations. 3.9 Option 2 Option 2 is simpler and benefit protection (paragraph 7.29) may not be a major issue given that AUPs are likely to be relatively smaller than IPPs (and potentially below the lower earnings limit). However, it does not address concerns around when the Regulations are engaged, for example, whether IPPs are paid by reference to time (see paragraphs 3.2 3.11 of the consultative document) and the underlying point that self-employed entertainers are, indeed, self-employed not employed, and so should be treated accordingly for NIC purposes. 3.10 Consequently, we agree with the conclusion at paragraph 7.33 of the consultation document that neither of these Options should be adopted. 3.11 Question 2: Do you agree that self-employed entertainers should be removed from the Class 1 NICs regime? Please give reasons for your answer We agree for the reasons noted at paragraphs 3.1, 3.2, 3.5, 3.6 and 3.8-3.10 above that self-employed entertainers should not continue to be deemed to be employed for NIC purposes. 3.12 Moving entertainers earnings into the Class 2 and 4 NICs regimes Chapter 8 suggests two options to move self-employed entertainers fully into NIC Classes 2 and 4: Option 3: Repealing the Regulations in respect of entertainers, and amending Social Security legislation to introduce a new higher rate special Class 2 NICs, for entertainers only, to be paid in addition to Class 4 NICs. The higher rate would be in return for access to contribution-based JSA; or Option 4: Repealing the Regulations in respect of entertainers in order that entertainers pay Class 2 and Class 4 NICs like other self-employed individuals. This is HMRC s preferred option as explained in Chapter 9 of this document. 3.13 Question 3: Do you agree that self-employed entertainers should be placed in the Class 2 and 4 NICs regime? We agree that self-employed entertainers should pay Class 2 and Class 4 NICs. This recognises the true nature of the arrangement between the self-employed entertainer and producer. 3.14 Question 4: If you answered Yes to Question 3, which of the two possible P/tech/subsfinal/ET/2013 3
options discussed in this chapter do you believe should be adopted? Both options alleviate the administrative and financial burdens on the industry but our preferred option is Option 4. 3.15 Option 3 While there may be a justification for a higher level of Class 2 contributions to gain access to contributory JSA, we think it is difficult to justify treating one group of selfemployed individuals differently to another group. While exceptions have been made in the past, eg for share fisherman and voluntary development workers, we do not see that the case for a special type of Class 2 contributions for entertainers has been made. If this were introduced we can envisage other sectors might also start to argue for higher Class 2 contributions in return for JSA entitlement. 3.16 Option 3 would also impose a financial and administrative burden on the entertainers (and Government; eg reduced revenue without a reduction in JSA obligations). In addition, it will not simply be a case of imposing a higher rate of Class 2; decisions will need to be made as to what payments are received as an entertainer and which are received in some other self-employed capacity. 3.17 Consequently, we do not think Option 3 should be progressed. 3.18 Question 5: Having considered Chapter 9, do you agree that Option 4 should be implemented as the future NICs treatment of entertainers? We agree with HMRC that Option 4 (repeal) represents the appropriate way forward. It would alleviate the current financial and regulatory burdens faced by the industry. It also provides the desired simplicity and transparency, and maintains the integrity of the NICs system. 3.19 While access to JSA and other contributory benefits would be lost, HMRC point out that entertainers will be able to access the new Universal Credit, just like any other self-employed individual. Whilst the benefit entitlement under the Universal Credit would be means-tested, this would appear to address the concerns here in terms of those most in need of support (paragraph 9.7 of the consultative document refers). In addition the immediate financial cost to the entertainer may be reduced, as, for those on lower earnings, the Class 2 and Class 4 NICs liability is likely to be less than Class 1 NIC deductions. 3.20 The Taxes Impact Assessment (TIA) notes that repeal will adversely affect pregnant female entertainers as entitlement to Statutory Maternity Pay (SMP) would cease and be replaced with the much lower Statutory Maternity Allowance (SMA). This point is important and there needs to be more research carried out to ascertain the size of the problem and to come to an appropriate solution before the Regulations are repealed. 3.21 Question 6: Do you have any other comments you would like to make about the information contained in this consultation document, or information which you believe is relevant to this consultation? We acknowledge that repeal would potentially expose resting actors to the wider financial risks of being self-employed. We also note from paragraph 4.5 of the consultative document that actors feel that they need the protection of Class 1 for JSA entitlement purposes (but do not think that Class 1 should be paid on AUPs). At the P/tech/subsfinal/ET/2013 4
same time HMRC discuss the position under JSA as compared to means-tested Universal Credit and we have referred to this above. However, a further way to address JSA entitlement concerns would be for industry stakeholders to work together and review standard contracts to see whether a standardised contract of service can be agreed. This would give entertainers the choice of paying Class 1 contributions etc rather than being exposed to the wider risks of being self-employed. 3.22 Question 7: Do you agree with our assessment of the Taxes impacts of Option 4? If not, please provide evidence for this. The Exchequer impact does appear not to take account of the current cost to the Exchequer of providing JSA contributory-based benefits to entertainers and the potential saving that would arise were this not so and payment was instead under the new system of means-tested Universal Credit. Another factor to consider is that less regulatory burden and lower cost, coupled with other initiatives to encourage the creative sector, may entice foreign producers to the UK; thus increasing Exchequer revenues. 4 General comment on the Social Security (Categorisation of Earners) Regulations 1978 4.1 The Social Security (Categorisation of Earners) Regulations 1978 override normal case law principles as to whether an individual is employed or self-employed and treat self-employed individuals as employed for NIC purposes. 4.2 There have been changes to both the way in which individuals work and the socialeconomic climate since the Regulations were enacted. We would suggest a review of all the categories to consider whether the need for special NIC categorisation rules still exists. 5 The Chartered Institute of Taxation 5.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 16,800 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 23 July 2013 P/tech/subsfinal/ET/2013 5