So, the Chancellor used yesterday’s budget to continue his vendetta against contractors. In particular, he’s targeting contractors operating through personal service companies.
The reason for this fresh assault on independent UK professionals? To curb tax avoidance.
Not that most contractors create a limited company to save on tax. But if they had their way, that’s what the government and media would have you believe.
Rather, these gutsy contractors have identified an opportunity. They have an in-demand skill that can add flexibility to businesses who either:
- don’t have full time roles for their specific speciality;
- have identified an opportunity/weakness that needs third party expertise to address it.
If the maths behind the punitive measures worked, Mr Osborne’s argument may carry weight. They don’t; IPSE has mapped out the figures using a modest example of £87,000*.
In reality, the Government’s persecution of individuals working through a Limited Company is self-defeating. Here’s why.
The undocumented labour (and cost) of running a PSC
Anyone who deals with contractors understands the burden they endure as a company director. Running your own business means you have to wear several different hats.
Contractors aren’t employees with a task-specific employment contract and a HR department. They are, for all intents and purposes, their brand, the face of it and the manpower behind it.
And it’s the government’s ignorance of this concept that’s causing the massive disconnect.
In short, the government hasn’t got a clue about contracting. So how can it govern that which affects the community in such an acute manner?†
The government doesn’t acknowledge the additional tasks that contractors take on board:
- double NICs;
- pitching for jobs.
Then there are the sacrifices contractors make that employees take for granted:
- sick pay;
- holiday pay;
- tools of the trade;
- death in service benefits.
- matched pension contributions;
These are all measures all contractors must address, inside IR35 or not. Some come with physical costs, like accountants and training, as well as (lost) labour.
This is not tax avoidance; it’s professional, self-employed entrepreneurial business.
Employee versus Contractor: a theoretical role reversal
*It’s not as if the government will reap a huge reward per capita with the envisaged changes. Even if all contractors switched to PAYE, HMRC has inflated its expectations.
Let’s use an annual turnover of £87,000 to keep consistency with IPSE’s figures.
All other things being equal, an employee pays around £2,000 a year more tax than a contractor on that sum.
Now, you tell me. Look at those two lists above. If you offered an employee £2,000 a year more, but stated that they’d have to take on all of that work in addition to their day-to-day tasks, would they?
The majority, they’d say no. They’d tell you where to shove the £2,000 first. Then they’d add a polite reminder that there are departments who deal with all that.
Yet still the Chancellor insists on chasing one-man-businesses for every last penneth of tax. It’s a fool’s errand that may well be his undoing.
The reason? Mr Osborne believes that this pursuit will net HMRC £400M. That’s a fair amount to find is not there when he comes to balance the books. But almost half a billion budget deficit could be the least of his problems.
The knock-on effect to the UK economy and public sector
For now, the Chancellor has chosen to implement the new measures in the public sector only. It means that public sector HR departments will have to decide if a contractor should pay tax at source.
Chris Bryce hinted at such scenario in a pre-emptive statement last year.
In it, he intimated that the proposed measures would cause massive confusion in the public sector. Moreover, “untold damage” and “significant harm” to the flexible economy.
It wouldn’t surprise us if public sector HR departments issued a carte blanche missive. To save carrying out case-by-case assessments, all contractors may go on the payroll.
Yes, that would make it easier for the administration and payroll departments. But which contractors would work on PAYE and accept the burden of running their company? It’s not gonna happen.
What if limited company contracting becomes unsustainable as a business model?
The private sector could suffer if the measurements reach beyond the public sector, too. As an example, 400,000 of the 4.6M self-employed in the UK are in the construction industry.
They have trained in their craft.
They’ve earned time-honoured service under their belt.
Their experience working on site is 100% relevant.
Does the Chancellor want to alienate that type of skillset?
If those contractors decide (sub)contracting doesn’t work for them, what then? The unimaginable outcome could be the same for both private and public sector.
First, the slew of trained contractors will stop knocking at the door. They’d favour the security of permanent employment and set hours.
In their place you’d maybe find an inexperienced group of consultancy workers. To rub salt in the wounds, they’d cost much more per hour due to the consultancies’ cut.
The UK owes a debt to its flexible friend
The Chancellor seems to have forgotten a debt that the UK owes. The flexibility of contractors provided the backbone of economic recovery.
But it’s not just the recovery the Chancellor ought to concern himself with. According to Deloitte, 46% of US big businesses forecast engaging freelancers in C-Suite roles.
It’s no surprise. The recession set a precedent, a new way of working.
Deploying short term contracts in specific expertise enabled firms to be competitive again. Engaging knowledgeable contractors saved thousands in man hours, weeks and months in immeasurable time.
If the Chancellor makes this route ineffective, he – and the UK – will lose that flexibility.
Contracting and freelancing are not fads. They are the stealth weapon businesses will deploy to enjoy continued growth. That’s if they can find the talent to spearhead their campaigns.
How has the Chancellor got this so wrong?
Our community’s job is to find out where the mismatch of information comes from. We need to help the Chancellor understand our lifestyle choice.
He needs to see why crippling the UK’s flexible workforce is wrong. It’s detrimental to both ensuring a full economic recovery and future growth. But where do we start looking?
† The Chancellor’s first choice should start a little closer to home. After last year’s emergency budget, the Government commissioned Julie Deane OBE to conduct a study on their behalf. She was to review self-employment in the UK.
Last month, she submitted her findings in a 41-page document to the Prime Minister. True, taxation was not one of the criteria of the report (?!?!).
But it was the overwhelming pain point Ms Deane received:
“Although outside the remit of this review, taxation was repeatedly raised by all of those interviewed – as an administrative burden, a barrier to growth, and an issue that could benefit from improved simplicity and better advice.
“Given the scale of concern I recommend that Government looks at this in more detail.”
What can you do?
For your part as a member of the contractor community, you can help via IPSE. The Association has changed the modus operandi of its IR35 forum to discuss tax issues at large. IPSE’s call to arms is clear:
“IPSE and the contractor community needs to come together to prevent the damage the Government’s latest planned actions will cause to freelancers, contractors and the self-employed.
“The larger we are as a group protecting, the greater the power of our voice in Government. We need to protect the UK’s flexible labour market.”
That quote comes from their latest newsletter; Chris Bryce has a point.
Mr Osborne won’t rest until all one-man-businesses are on PAYE. Even with a Downing Street-commissioned report at hand, he continues along this path blinkered.
We cannot let propaganda win; the UK’s flexible workforce is amazing and invaluable. Let’s keep it that way.
Author: John Yerou
John Yerou is the owner and founder of Freelancer Financials; a trading style & trade mark of the award winning Mortgage Quest Ltd. One of the most recognised names in providing mortgages for contractors and freelancers across the UK.
In 2004 John began his career in Financial Services as an independent mortgage adviser and broker. John has been instrumental in negotiating bespoke underwriting for contractors with high street lenders.
His presence in the industry as a go-to expert is growing by the day and he is regularly cited and writes in publications both locally and nationally.