It is Obvious

Chris Rick has got altogether too much to say

Bad Idea – 2

Posted by chrisrick13 on June 23, 2010

It is obvious: there are a lot of really good ideas.

I have been a software contractor most of my working life.  Some long time ago I formed a limited company and hired myself out by the hour to build software.  A lot of people did the same.  It was a way of earning big money and not having to give up the technical skills to become a manager.  This meant that there were a lot of people who developed very deep but narrow skills.  They did a job and moved on.  This meant that companies did not have to hire someone permanently when they only needed that job done for a few months.  They also got the deep skills.  In the UK there were a lot of very successful projects that used this model.  We had a lead on the rest of the world.

I paid myself a salary…and my wife, who did some stuff in the company but mainly brought up our kids who had to be introduced to me on the odd occasion that I was at home.  I also paid a dividend for an increasing amount of the money that flowed into the company and out to me.

I certainly avoided paying some tax and a lot of  National Insurance contributions (NIC) as it is not levied on dividends.  It was not all plus as there are plenty of downsides to being a contractor.

Then the Labour party came into power.  They introduced the infamous IR35 regulation which was a very messy way to stop contractors paying themselves dividends to avoid paying NIC.  It had the immediate effect of shutting down the lead that the UK had on the rest of the world.  Then a lot of bright people turned a lot of their energies from writing software to avoiding IR35.  A whole industry sprang up around it.  A lot of older contractors decided it was time to retire taking their skills with them.  The government predicted £600m income but actually lost more trying to implement it than they got in extra revenue…and destroyed a UK winner.

There was a better solution.  NIC is a tax.  It is just not called one.  It applies to the first £12,000 or so of income and therefore is uniquely targeted at the low paid.  Companies also pay it.  As it is on a per employee basis it is an added cost to employing someone.

What we should do is ban NIC.  Increase income tax.  Increase corporation tax.  Make it neutral (to start with).  A lot of low paid will be taken out of tax all together.  Companies will not pay to employ people but will pay when they are successful.  Administration of the tax collection will be hugely simplified.  A lot of people will move to a position of understanding their tax affairs fully.

I find it difficult to think of too many downsides other than the political one of increasing taxation and not getting voted in next time and by simplifying things reducing the number of voters that can be fooled in a budget.

So it hasn’t happened and it never will.  I wonder why not?

It is obvious: there are a lot of really good ideas but they never happen

7 Responses to “Bad Idea – 2”

  1. Bill said

    While there is a great deal of merit in the argument that taxation of innovation has the effect of stifling new ideas or initiatives I have seen the situation from the other point of view. In addition to the lone developer working hard to identify and produce ground-breaking software there was the other type of contractors which made up the bulk of this workforce. These people worked alongside other developer staff and provided additional hands to the pump. As far as I could see they were generally not a lot better at their jobs than the other non-contact staff but were paid a great deal more due to the uncertainly inherent in their jobs. I have to admit that they were probably more productive as they avoided the ‘overheads’ associated with large companies: inductions, team briefings, personal development processes, irrelevant training etc. but generally they were paid a hefty premium for not being in-house staff. The unfair(?) part was they were also ‘paid’ a premium by the government for being contractors. Namely the ability to use a shell company to avoid tax, claiming back VAT on cars, meals, books, travel and, as has been said, using relatives nominally working for the company to reduce the tax burden. It was these employees in all but name that got the contacting industry a bad name and eventually lead to the introduction of IR35, which just says that if your job is to work for (mainly?) a single employer then you should be treated as an other employee.

    I recently posted that I’d seen a breakdown of the UK economy on a ‘Family’ basis that made the figures more understandable. I still can’t find it but I have produced my own by dividing the Daily Mail figures by the number of UK families (17.1M) (See below). This means (I think) that the gov. has borrowed £76k for each and every family (including the ones on benefit) plus another £4k for PFI but it only has an income of £32k to support this debt. It needs to borrow another £8.7k a year to avoid penury of which £2.6k is to meet the interest payments.

    I think it is clear that if I went to the bank for a further loan to pay off the interest due on my current loan plus a bit on the side I would get short shift from the Manager…

    Daily Mail 17.1M # of UK families
    UK (£B) Family
    Debt 1300000 £76,023.39
    PFI 68000 £3,976.61

    Income 548000 £32,046.78 pa
    Expenditure -697000 -£40,760.23 pa

    Expenditure (pa)
    Social Security 194000 £11,345.03
    Health 122000 £7,134.50
    Education 89000 £5,204.68
    Defence 40000 £2,339.18
    Public Order 35000 £2,046.78
    Personal Social 32000 £1,871.35
    Housing & Envir. 27000 £1,578.95
    Transport 22000 £1,286.55
    Industry, Argicult
    & Employment 20000 £1,169.59
    Other 73000 £4,269.01
    Debt Service 44000 £2,573.10

    National Income (pa)
    Income Tax 150000 £8,771.93
    National Ins. 99000 £5,789.47
    VAT 81000 £4,736.84
    Excise Duty 46000 £2,690.06
    Corporation Tax 43000 £2,514.62
    Council Tax 25000 £1,461.99
    Business Rates 25000 £1,461.99
    Other 79000 £4,619.88
    Borrowing 149000 £8,713.45

    I was amazed at how much Social Services (its split into two items!) costs comapred to something that I thouight would be VERY expensive (like defence) and also how much National Insurance raised in tax (it isn’t a lot short of income tax!!)

  2. Bill said

    Sorry Mr Obvious – The money was in nice columns when I submitted it but WordPress seems to have lost the lot.
    Do you know if s work in WordPress?

    • Bill said

      Well it took out the word before ‘s’ which was TABLe with a Less-than before and a greater than after so perhaps it worksing? Testing Testing…

      UK (£M)Family
      UK Total Debt1,300,000£76,023
      PFI Debt£68,000M£3,976
      UK Tax Income£548,000M£32,046
      UK Gov Spending£697,000M£40,760

  3. Kevin said

    What is going on? Isn’t it obvious that the country is in a BAD WAY and yet the press expresses surprise that some people are going to be worse off after the budget. Even NotAYesMansEconomics says -SHOCK- -HORROR- that benefits claiments will not be as well off using CPI (which excludes housing costs) rather than RPI (that does). As (I assume?) they claim housing benefit that seems fairer anyway.

    As predicted earlier, everyone is in favour of a tough budget – unless it hits them that is.

  4. Mark said

    In response to Bill:

    Re Contractors/IR35. I completely agree with you, even though I was a contractor. Contracting was the epitome of Thatcherism and rampant self-interest.

    Contractors were to the 70’s – 80’s what stock market traders were the the next decade and hedge fund managers were to the next (with rewards increasing by an order of magnitude with each jump). We had a great, very well-paid life and made little fiscal contribution to society.

    One may regret the passing of such days of unbridled income, but it’s hard to defend them. If talent left the stage because they could no longer fiddle their taxes, so be it. I totally don’t buy the argument that we have to pander to contractors/bankers (etc.) or they will leave the country and go elsewhere. IMHO if they go, they were probably going to go anyway and the vast majority just whinge, bluff but stay. Present company excluded of course 🙂

    Re long list of figures. Pity you couldn’t find the original source. I think anything posted in any newspaper is totally untrustworthy due to every paper having their own agenda, unless clear sources are cited.

  5. Mark said

    In response to Kevin:

    Yes it is obvious that the country is in a BAD WAY. But that doesn’t mean that a tough budget is automatically a good budget.

    I heard a (allegedly by R4) respected Japanese economist giving his analysis. And it was not pretty. Cutting early and deep was exactly what plunged Japan into 20+ years of doldrums. They now spend merrily and have one of the highest deficits in the world, but that doesn’t seem to be a problem, despite what the recent newspaper articles say.

    I am hearing more and more comentators, of all political colours, say that the governments deep cuts are ideological rather than economic (Humphries gave Cameron an enlightening grilling this morning).

    Looks to me that the Nice Party mask has well and truely fallen off. It had completely fooled me.

    It is amazing that we have a popular uprising to support Inheritance Tax, which is actually paid by less than 1% of the population. Same applied to CGT.

    Turkeys/Christmas springs to mind.

    At least left-wingers are self-interested for their own self interest. Tory supporters seem to be ‘self’-interested for the benefit of their betters. A neat trick.

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