Delay is not enough: Chancellor is calling down catastrophe on self-employed sector and the economy

Posted On: 
30th October 2018

Extending tax changes will still stifle one of the UK’s most productive and dynamic sectors just when the economy needs it most, says IPSE.

It’s not just the self-employed and their engagers who will suffer from 2020: so will the broader economy, says IPSE.
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PA Images

With his latest Budget, the Chancellor will bring down a disaster both on the self-employed and also on the wider economy. Not only has he recently announced he is cancelling plans to scrap the iniquitous self-employed-specific Class 2 National Insurance Contributions; now he has said he will extend the changes to off-payroll tax rules from the public sector to the private sector.

Thanks to the efforts of IPSE and other business groups, he has delayed the changes until 2020 and exempted small businesses – but it is not enough. Extending these changes will still stifle one of the UK’s most productive and dynamic sectors just when the economy needs it most.

The off-payroll working rules – widely known as ‘IR35’ – are designed to clamp down on ‘false self-employment’. In essence, when HMRC believes a self-employed person should more properly be classed as an employee, it can choose to tax a higher employee rate – without any of the benefits and rights. Clamping down on false self-employment may seem reasonable enough: the trouble is that IR35 is so complex that it catches out many legitimately self-employed people. They find themselves dragged through extremely expensive, reputation-damaging employment tribunals just to prove their working status.

In April last year, instead of simplifying this tangled mess, the government made it worse. In the public sector, it changed the rules so that it was no longer self-employed people themselves who determined their working status, it was their engagers. Public sector bodies had to decide whether or not their contractors were ‘caught’ by IR35. That meant they all had to navigate the extreme complexities of the tax law. Instead of risking that, many just made blanket decisions, declaring all their contractors ‘under IR35’, taxing them like employees without any of the rights like holidays and sick pay.

The result? Understandably, many contractors upped sticks and left the sector – some even left self-employment altogether. It caused severe delays and the scrapping of projects across the public sector. It even seems to have exacerbated the NHS staffing crisis.

The Chancellor has now announced he is going to extend these very same changes into the private sector in April 2020. While some groups have welcomed the delay, this is surely only a stay of execution for the self-employed and the businesses that engage them.

When the changes come into force, although the smallest businesses have been exempted because of IPSE’s lobbying, the rest will be lumped with the enormous administrative burden of deciding the IR35 status of all their contractors and freelancers. And when 75 per cent of HMRC’s IR35 rulings in the last decade have been overturned, how can other businesses be expected to effectively navigate the complexities of this tangled tax law? Most likely they will do what public sector bodies have done and make blanket judgements, declaring all their freelancers and contractors ‘under IR35’ – leaving them taxed like employees but without any of the rights and benefits.

This is profoundly anti-small business. Large, multinational companies who engage contractors will now have the power to unilaterally alter the tax affairs of the smallest businesses, the self-employed.

And it’s not just the self-employed and their engagers who will suffer from 2020: so will the broader economy. Extending the changes to IR35 will effectively stifle the self-employed sector – one of the UK’s most dynamic and productive sectors. Last year alone, it contributed no less than £271bn to the economy. With the uncertainty of Brexit fast approaching, the economy needs sectors like the self-employed to be firing on all cylinders, not suffocated out of existence. So, for the good of the self-employed; for the good of businesses up and down the UK; for the good of the entire economy, the Chancellor must rethink this disastrous measure.