In the run up to the budget on the 21st March, I called on the Chancellor to come out fighting for the UK’s smallest businesses, a sector that contributes £82 billion to the UK economy annually – freelancing. As the dust settles on the Budget, how well did the Chancellor do?
John Brazier, PCG’s Managing Director
Whilst welcoming the rise in the personal allowance, the Budget contained little to significantly help the UK’s 1.6 million freelance businesses. Specifically, the Government did not further clarify IR35 and a new consultation raises deep concerns over the future of interims and some freelancers operating within the public and private sectors.
Going back to IR35, the Red Book states, “The Government will introduce a package of measures to tackle avoidance through the use of personal service companies and to make the IR35 legislation easier to understand for those who are genuinely in business.” What exactly does the Government mean by this, after all the detail is crucial for freelance businesses? Having worked hard on the IR35 Forum in the last year debating how current legislation could be targeted to give clarity for one person businesses and at the same time stop disguised employment I had been hoping there would be more of an update in the Budget than this rather generic statement.
One significant announcement contained within the Budget, on which I am seeking urgent clarification, was the Chancellor’s plans to require those engaged as “office holders/controlling persons” who are “integral to the running of an organisation” to become PAYE. These plans appear ambiguous and may affect senior interims. It is crucial that these legitimate businesses do not suffer as a consequence, and surely we are looking to simplify the tax system so this consultation must sit within the IR35 debate, not supplement it.
Ours is a sector still reeling from the recent press coverage surrounding the exposure of Ed Lester, the head of the Student Loans Company who it is claimed was granted special concessions to hold his role through his limited company by HMRC. This mobilised the media and some politicians to launch a campaign focussing their attention on one person limited companies operating within the public sector. The received assumption in much of their rhetoric is that such people are “tax dodgers” which is of course fundamentally inaccurate.
I am in no way defending Ed Lester’s employment arrangements, this may well have been a case of false self-employment. Disguised employment should be investigated and stopped but legitimate contractors should be allowed to carry on and not be penalised when they are contributing to the economy, providing value for money for the taxpayer, and providing a necessary skill or service to the public sector.
In response, the Chief Secretary to the Treasury, Danny Alexander MP has launched a review into all those engaged in the public sector through what he calls ‘personal service companies’. This is said to extend to over 4,000 contracts and could cover a range of sectors from IT to nursing. We are already seeing evidence of contracts being terminated, where the use of a contractor has been perfectly legitimate, as some in the public sector seek to pre-empt the findings of this review.
We now know that a further consultation, at the behest of the Chancellor, will be launched in the summer. My colleagues and I will be working hard to ensure that interims, consultants, and contractors are represented in this process.
If George Osborne or Danny Alexander seek to restrict the use of freelancers in the public sector, they would be doing so in the face of strong public support for the sector. A recent ComRes survey showed that 79 per cent of the public believe that the Government should make it easier for companies to adopt a flexible workforce approach. Criticising the use of contractors and consultants in the public sector undermines this flexibility. More importantly, a significant number of freelancers will likely withdraw their services altogether, thus denying the public sector the benefit of their skills and the value for taxpayers’ money that they bring.
Overall, I believe that the Budget failed to directly address the needs of freelancers; in fact it leaves me questioning the Government’s commitment to flexible working. With consultations, reviews, and amends to IR35 imminent this Budget has confirmed our expectation that the next few weeks and months will be crucial for the future of all freelance businesses.
I urge Danny Alexander and George Osborne to set aside the media hype and instead focus on supporting a growing sector that contributes significantly to the economy. If they fail to do this and allow themselves to be swayed by a few high profile media stories then they risk creating anti-business public sector that would cost jobs and growth in SME’s and freelancing at this crucial time.
This blog was originally published on the Huffington Post UK website here >>
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“Disguised employment should be investigated and stopped but legitimate contractors should be allowed to carry on”.
This is perhaps true, but nowhere have I seen a clear definition of either. How can we as contractors, let alone the government, even begin to draw a line between the two?
If seam ridiculous the government still is concentrating on the negatives of freelancers registered as limited companies. We add a lot to the economy keeping it flexible and more organic, which is essential for companies to keep streamlined in this curent climate.
I use specialised freelancers myself to grow and take on larger projects, without the fear of having highly specialised people in-house permanently.
I’ve just taken The PCG Test and nowhere did it ask about the risks relating to the wasted effort and expense contractors go to in trying to pitch for business directly to clients. Nor, the risks of enduring the frequent contract breaks that are a feature of contracting.
The normal source of my income is agency contracting. However, because I’ve been on the bench for ten months, I recently put considerable time, effort and expense into pitching for work from a local company. (Incidentally they contacted me so I couldn’t truthfully answer ‘Yes’ to the questions about my advertising costs.) However, the prospect ultimately didn’t go ahead, despite my offering to negotiate the price downwards. I know other contractors who make similar efforts to get independent business, so I can’t understand why is this effort not acknowledged as evidence of being in business in our own right, and therefore an investment risk if it doesn’t come off.
I also feel that another unacknowledged risk is the risk that I will probably have to take to wind up my company in July because my war chest is nearly depleted. Surely this also needs to be identified as a risk of contracting? Afterall, we can’t claim benefits so we have to ensure we have an adequate war chest to cover sometimes prolonged contract breaks.
I feel there is still a distinct lack of understanding about what the way in which contractors operate. To cite my own example, I am not in mainstream development, so in 14 years of contracting I don’t suppose I have earned much more than a normal employee, in which time I haven’t enjoyed any of the protection or benefits of permanent employment, but I have risked my own revenue supporting myself through regular contract breaks. Where is that acknowledged? I feel let down.
I also note that the calculated tax example in the consultation paper is flawed because it takes no account of VAT, which increases the amount of tax paid but which is not applicable to those earning high salaries within PAYE. The differential between the two income methods is closer than shown or implied in the paper. Is this yet more sloppy spin from Whitehall and Westminster?
The VAT collected by the contractor from the customer would be reclaimed so the net amount of VAT collected on the transaction by HMRC is 0. Not sloppy spin!
It’s positive to see that the PCG are fighting for the rights of freelancers in the UK.
HMRC and upper class politicians are not in touch with freelancers/contractors, and it will be very interesting to see what the effects the imminent amends to IR35 will bring.