New Freelancing Tax Model Would Boost Innovation and Growth

I’d like to say ‘Happy National Freelancers’ Day’ to the 1.56m freelancers in the UK, which is one in 20 people in the workforce and so we all probably know someone. A new report by Prof. Andrew Burke of Cranfield University has stated “freelancers not only play a significant role in developing innovation, their work also creates permanent jobs.” Burke says, “freelancers serve a distinct business function which distinguishes them as unique economic agents in their own right.”

The majority of the freelancers work in IT, engineering, and business consultancy. What characterises them is that most of them operate their own limited company of which they are the sole employee because their clients demand they have limited liability, and it’s also an efficient means to cover expenses.

Most freelancers work in the knowledge economy where their assets are their skills and knowledge as opposed to their equipment and they move from client to client or project to project on short term contracts.

Off payroll

While freelancers use their limited companies as vehicles for entrepreneurship, others use the same vehicle to avoid tax. In February it transpired Ed Lester, the CEO of the Students’ Loan Company, was operating in such a fashion – being paid as a freelancer but enjoying the benefits of employment, for instance getting his pension topped up.

It is a very generous client that pays into its supplier pensions. I understand locum NHS doctors expect to be paid in a similar way – freelance wages, but with their pensions topped up. It all sounds very questionable.

An embarrassed Government then revealed some 2,500+ senior people in Whitehall were using ‘off payroll arrangements’ and were probably enjoying other on-payroll advantages such as pension contributions.

It was then discovered the BBC was awash with such arrangements particularly among its celebrities alongside genuine freelance technicians and production people. The BBC has admitted something was ‘wrong’ as it now plans to bring contract workers ‘on-payroll’ as soon as their contracts end. It all sounds a bit messy and one suspects it won’t be the celebrities who will be affected.

Draconian

The Government says all senior contract workers on Government projects must pass a test or they will be brought on-payroll. The Professional Contractors Group (PCG) believes these “draconian measures outlined will render freelancing within the public sector almost impossible”. All these responses have tarred genuine freelancers with the same brush.

Note all these abuses are in the public sector – whether Whitehall, BBC, NHS or Student Loans – but the knee jerk reaction of government is to apply the rules equally in the private sector on genuine freelancers.

This has happened before in 1999 when John Birt then Director-General of the BBC was discovered to have been paying himself via a limited company. Big IT companies, worried about being undercut by freelancers, used the scandal to get the Government to clamp down on freelancers in IT and engineering by introducting a new tax called IR35.

Parliament was told the legislation was necessary because “here is an uneven playing field, which is disadvantageous to major organisations.”

The unpopular measure means many freelancers are taxed as employees and unable to retain earnings for investment such as training. Contractors now buy tax insurance or have to change from working through their own companies to using umbrella companies (sort of shell companies where you become a temporary employee). Today there are about 200,000 contractors using such vehicles.

Recently Radio 5 revealed thousands of supply teachers working through such a company based in Jersey that was using its offshore status to avoid paying employers national insurance.

Reform

As for contractors, two years ago they still believed the rhetoric from the Tories and Lib Dems that they would either reform or repeal IR35, but instead they just reviewed it and then decided they would make it tougher.

If any lessons are to be drawn from IR35 and this debacle it is that this sector of the economy needs serious reform. We need tax and employment models fit for purpose.

In 2001 a High Court judge described the tax and employment rules for freelancers as having more in common with a 19th century master and servant relationship. So how can we have a 21st century, knowledge-driven, highly skilled and flexible economy when its basic rules are designed around the engagement of household servants in Downton Abbey?

While contractors will no doubt wish to say ‘a plague on all your houses’, understanding the issues and making changes offers a big opportunity to all the political parties. Alastair Campbell seems to get it. He says “the Government must start to appreciate that for more and more people freelancing can be a lifestyle choice’ and that ‘Government must help this growing community for the good of the country”.

Business model

The key point is to recognise professional freelancing as a legitimate business model which was the thrust of Prof. Burke’s report.

Perhaps a specific tax model can be built for freelancers differentiating them from temporary workers but also allowing them to fairly use a limited company for a single person in a fair way – a limited liability version of self-employment, or alternatively to carry on using the current model. A similar thing was done for partnerships under the last government.

Given there are 1.56m freelancers in the country, when anyone talks about deregulation and removing red-tape, this must be a good place to start. The party that truly “gets it” and empathises with this army of workers, can both help kick start recovery and secure a mandate for government. This is why Labour should look closely at the freelancing market, because as any entrepreneur would tell you, it is ripe for change and innovation.

Philip Ross is Chairman of Labour’s Small Business Forum and author of “The Freedom to Freelance”

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