Its latest economic survey of the UK the OECD says maintaining close ties with the EU and implementing policies to boost productivity will be crucial for maintaining future living standards, and says there is scope for a tax and spending review, to identify additional fiscal initiatives. These include the potential for higher NICs for the self employed – an option which the Chancellor introduced in his March Budget but was forced to abandon only days later under political pressures.

However, the OECD report states: ‘To improve fairness in tax policy and reduce risks for the financing of the social insurance system, the authorities should gradually reduce the gap between national income contributions for self-employed and employees, as they planned to initiate in early 2017.’

In support of this, the OECD’s review of the UK economy says self employment has continued to expand, which is narrowing the tax base as self employed workers pay lower national income contributions relative to employees, which historically reflected differences in state pensions and contributory welfare benefits. However, these differences have been reduced with recent reforms, as self-employed workers build up the same entitlements to state pensions as employees since 2016.

The report states: ‘Self employed workers benefit from public services in the same way as employees.There is also a risk that employers are pushing workers into self-employment to bypass national income contributions and minimum wage regulations.’

The OECD argues tax incentives also play an important role in the expansion of self employment, with a significantly lower labour tax wedge facing self-employed relative to employees. Moreover, half of the growth in self-employment over the last decade has been in the form of single directors, who are subject to even lower taxes.

It wants the government to reduce this gap to promote equity across different types of the workforce and sustain the financing of the social insurance system. Citing the recent findings of the Taylor review, which recommended a new definition of ‘dependent contractor’, the OECD says that to address the issue of job security the authorities should introduce tighter criteria to become self-employed, notably by focusing on the extent of economic independence of self-employed workers vis-à-vis their clients.

The report also says that to improve job security and incentives of low-skilled workers on zero-hours contracts, the government should review the regulatory, tax and benefit underpinnings of this form of employment. Individuals on zero-hours contracts, who already have full worker rights, could receive enhanced rights after three months to increase job security, including minimum notice periods and redundancy pay.

In addition, the OECD advocates indexation of state pensions on average earnings only, stating this would be fairer, while it would still allow pensioners to benefit from improvements in living standards. The report says that reforming the triple lock indexation for state pensions – pensions rise by highest of the rate of inflation, the rate of increase in average earnings, or 2.5% – would share consolidation efforts more widely.

The OECD report notes that the corporate tax rate has been reduced substantially over the last decade, from 30% in 2007 to 19% 2017, the lowest single rate for businesses of all sizes in the G20, with an additional cut to 17% for 2020. It says this would broaden the gap between the taxation of capital and labour, which could reduce inclusiveness, while because of the effects of Brexit, the impact of the rate cut on investment and supporting demand might be lower than previously anticipated. Hence, public spending on hard and social infrastructure could be considered instead to support demand in the short term and to enhance potential growth in the longer term, with a focus on addressing the regional productivity divide.

OECD Secretary-General Ángel Gurría said: ‘The UK is facing challenging times, with Brexit creating serious economic uncertainties that could stifle growth for years to come. Maintaining the closest economic relationship with the EU will be absolutely key, for the trade of goods and services as well as the movement of labour.

‘Macroeconomic and fiscal policy can and should continue being used to support the economy, both during and after the exit negotiations. Future prosperity will depend on new reforms to improve job quality, boost labour productivity and ensure that the benefits are shared by all.’

Commenting on the report’s findings, George Bull, senior tax partner at RSM said: ‘The OECD approves the increase in the income tax personal allowance to £11,500 – which, as we have previously noted has contributed to the continuing contraction of the UK’s tax base. At the same time, it is advocating broadening the tax base by increasing NICs for the self-employed.

‘As Chancellor of the Exchequer Philip Hammond made a short-lived attempt to impose just such an increase in his March 2017 Budget, it will be interesting to see whether he returns to this theme in his November 22 Budget, especially in light of Matthew Taylor’s recent review of modern working practices.’

‘Pensioners will also want to watch the upcoming Budget with interest, given the OECD’s call for state pensions to be indexed to average earnings only. This may signal that an end may be in sight for the triple lock.’

The Association of Independent Professionals and the Self Employed (IPSE) expressed its dismay at the OECD call to raise taxes for the self-employed. 

Simon McVicker, IPSE’s director of policy, said: ‘It seems beyond strange that the OECD believe that raising NICs for the self-employed – and thus stifling our flexible labour market – could somehow boost productivity.

‘The self-employed bring invaluable flexibility to our economy, which is in fact one of the UK’s biggest competitive advantages over other OECD countries. By providing flexible expertise to businesses, the self-employed help them to innovate and expand, which in turn allows them to take on more staff, thus boosting employment across the country.’ 

The OECD 2017 UK economic survey is here.

Report by Pat Sweet