Self-employed people who want to avoid next month’s Budget 2017 changing both how they earn and how much have been dealt two body blows in about as many weeks.
Landing the first blow, the Institute for Fiscal Studies calculated that such sole traders receive a tax advantage of about £1,240 per freelancer a year, which it said “cannot be justified”.
And despite those who ‘go it alone’ having no guarantee of a pay cheque every month, the IFS claims it is “difficult to make a case that differential tax rates should be used to reflect…whether individuals take risks.”
The Association of Independent Professionals and the Self-Employed (IPSE) is dumbfounded. “To suggest the self-employed are somehow operating to the detriment of other workers is ludicrous,” it said.
The association’s CEO Chris Bryce added: “The IFS, like many others, have totally failed to recognise the huge differences between employment and self-employment.
“Working for yourself means taking on all the risk -- you get no sick pay, no paid training, no employer pension contributions, no big company benefits, and no guarantee of another job when your contract is complete.”
Another freelance trade group, the Freelancer and Contractor Services Association, described the IFS’s report as “fundamentally flawed”.
“Self-employed people do not have access to NICs-funded statutory benefits like unemployment benefit or sick pay and when it comes to maternity allowance, employees receive at least 57% more in maternity pay than self-employed workers”, the FCSA said.
Julia Kermode, FCSA’s chief executive, took issue with the institute’s claim in its report – Tax, Legal Form and the Gig Economy -- that freelancers have the same entitlement to the new state pension.
“Self-employed workers are not part of the new auto-enrolment model, so they cannot access the tax relief that is afforded to employees and funded by NICs under the new scheme.,” she said.
“Furthermore, they will need to have paid 35-plus years of NICs in order to receive the state pension, and many self-employed people might not be in this position so it is far from a level playing field.”
‘No criticism of self-employed’
Since receiving flak after its findings against people who work for themselves (incorporated freelancers are accused by the institute of an even greater ‘unfair’ tax advantage), the IFS has defended itself.
Speaking to Recruiter magazine, the institute said its report makes “no criticism” of self-employed people -- or their behaviour, but says its criticism is of “government tax policy.”
But potentially serving to reignite tensions, the IFS then added: “ Our analysis [is] of why most of the reasons used to defend lower rates for the self-employed simply don’t hold.”
‘Increasingly difficult’ as self-employed
One reason which the institute’s report does not appear to cite is the sheer amount of existing and incoming legislation and red tape that detracts from the earnings of people in business of their own account.
Such legislation can also be time-consuming, even for those who are unaffected but still have to comply, such as with IR35, the Settlements legislation and last year’s removal of the NI Employment Allowance for one-person director companies (who from April 2016 are also affected by a higher rate of tax on dividends).
“The restriction of tax relief on travel and
subsistence expenses, the tightening of rules on intermediary reporting and the
forthcoming changes to IR35 legislation in the public sector have all made life
increasingly difficult for the UK’s self-employed workforce,” added IPSE’s Mr
Bryce, listing three additional legislative constraints freelancers face, which are on top of Making Tax Digital, set to cost each freelancer £280.
Despite this, he says the suggestion in the IFS’s report is that more legislation – not less – is the answer for addressing what it calls the “preferential treatment” of the self-employed, and the ‘penalisation of employees.’
“Now is a good time to consider the employment rights and benefits of different groups,” write the IFS report authors Stuart Adam, Helen Miller and Thomas Pope.
“The government should set out a plan to align the overall tax rate schedules facing employees, the self-employed and company owner-managers, so that a marginal pound of income is taxed in the same way regardless of how it is earned.”
‘Self-employment reduces tax take’
For now however, it is merely his comments that are ‘anti’ self-employed and, taken with the IFS’s report, they represent the second attack on such single-person businesses.
“There is no question - and Phillip Hammond said this in the Autumn Statement - that when self-employment rose that reduces the tax take to the exchequer,” Mr Taylor told the BBC.
“There are reasons why that might be a good thing in terms of how those people are working, but it is clear to a certain extent what is actually going on is, people are creating forms of work for themselves, or businesses are creating forms of work, to try to avoid tax.”
Freelance group IPSE responded: “As Mr Taylor points out, more people working this way is undoubtedly a positive.
“However, some unscrupulous businesses are exploiting self-employed workers to deny them the employment protections they deserve. This review should explore how government can clampdown on these companies, which are giving self-employment a bad name.”
The association repeated its call for the review to create a definition of self-employment, “so everybody’s thinking is aligned,” and subsequently the government should act.
“Policymakers must then put the Taylor Review’s recommendations into action,” Mr Bryce said.
But the FCSA wants reflection
before action. “I would urge the government to wait for the full outcome of
Matthew Taylor’s review that is due in the summer and avoid any kneejerk
reaction that would once again result in rushing through legislation that could
have serious negative implications,” Ms Kermode said.