Chris Bryce is CEO of IPSE, the Association of Independent Professionals and the Self-Employed.
George Osborne was so well entrenched in Number 11 that we had a pretty firm understanding of the direction of travel. Deficit reduction, austerity and clamping down on tax avoidance were the intertwined priorities.
After what was a lively Conservative Party Conference, we are beginning to get a sense of our new Chancellor and, indeed, new Prime Minister’s plans. Brexit is obviously the key issue but there are other areas that will be crucial to our economy. We at IPSE are hoping he will take this opportunity to back the UK’s 4.8 million self-employed workers that make the UK economy flexible and agile enough to cope with what may be challenging times ahead.
Tax avoidance became heavily politicised during the Osborne years. Too often it was small business that bore the brunt of his reforms. And he reserved the most pernicious polices for the very smallest businesses – the self-employed. Theresa May made tax avoidance a key part of her Conference speech, challenging international companies that take paying tax as “an optional extra” to pay their fair share. This is the right thing to do, but in all of this the Government must be clear about who is being targeted as a “tax dodger” and not cast small businesses that take their obligations seriously in the same light.
Under Osborne’s Chancellorship we saw the introduction of a raft of legislation that had the effect of restricting or inhibiting the flexible labour force, all in the name of tax avoidance. His parting gift to our sector was a proposal to change the way self-employed contractors are taxed in the public sector.
Complex rules known as IR35 are used to distinguish genuine businesses from would-be employees who are merely pretending to be businesses in order to gain a tax advantage. The problem with the rules is they affect all contractors who work through a limited company, the vast majority of which are fully tax compliant. The plan, if it’s implemented by the new Chancellor, will make the problem much, much worse for contractors engaged by public sector clients. For the public sector bodies that rely on these contractors, it will be calamitous.
We know from our own survey that contractors will leave the public sector in their droves if these rules are brought in. Public services will ultimately suffer most from this proposal. Public sector bodies, seeking to salvage and maintain large scale projects, will have to find alternative resources – or hire contractors at an increased rate – leading to significant cost to the taxpayer.
It’s not just IPSE who thinks this proposal is flawed. Business and accountancy groups are alarmed by the consequences of bringing this in; the Office of Tax Simplification took the unusual step of responding to the consultation in order to raise their concerns. Even HMRC’s own published research has shown it to be a bad idea.
So far this proposal applies only to public sector contracts – but for how long? If these rules were applied to the private sector the consequences would be felt throughout the entire economy. These knowledge workers contribute £3.5 billion to the economy every year, and that’s just those working in the public sector. If you include the much bigger number of so called “personal service companies” working in the private sector the contribution climbs to a staggering £38 billion.
This is exactly the sort of economic activity a Conservative Chancellor should be supporting: talented people, striking out on their own and providing much needed skills to private and public sector clients on a flexible basis. But in his rush to demonstrate a hard-hitting stance on tax avoidance, Osborne also penalised the very people the economy needs most. What disturbs us, and many of the business groups we work with, is the lack of impact assessment the Treasury has done around this and policymaking that is being made without the evidence to back it up.
Of course all taxpayers should pay the right amount of tax and it is clear the fragmentation of labour markets presents a test to revenue collectors not just here but around the world. But the Government must respond radically and with enthusiasm for this increasingly popular way of working. Trying to cram taxpayers into the traditional boxes of employee or employer, when neither apply, will serve to stifle innovation and destroy flexibility.
It may be that we will have to wait until the Autumn Statement to get a true sense of whether Philip Hammond will carry on in the vein of Osborne, or whether he will take a different tack. However, from his time as Shadow Chief Secretary to the Treasury, we believe the new Chancellor understands how important this group of knowledge based workers are to the public sector, and to the economy as a whole – unlike it seems, the former Chancellor.
The Chancellor must base his policy on the evidence being presented to the Government. We urge him to make sure he maintains the flexibility in our economy, our major competitive advantage in this Brexit era. It’s an ideal chance for the new Chancellor to reset the economy policy and to signal his support for the UK’s smallest businesses.