The self-employed and ‘deemed employees’ are the solution, not the problem.

Rebecca Seeley Harris says that while the self-employed and small businesses are not the revenue-raising solution for the Treasury at this time, they are the solution for economic recovery.   

The self-employed and small businesses make up 99.3% of the total business population in 2020. This means that last year employment in small businesses was 13.3 million (48%) and turnover was ￡1.6 trillion. This combination makes the self-employed and small businesses a hugely important sector. This part of the economy has been growing year on year, especially recently due, in part, to the rise of the gig economy. It is, in short, a sector that is the lifeblood of the UK economy and will no doubt be what brings us out of the depths of economic despair.   

Self-employment Income Support Scheme

During the pandemic, the Government has extended the arm of support to millions of self-employed people under the Self-employment Income Support Scheme (SEISS). It was an unusual move in March 2020, because the Government would not ordinarily be expected to support the self-employed, and they should be applauded for taking this step.  

Unfortunately, SEISS has supported some and not others and has divided the population. There are thought to be 3-4 million self-employed and small businesses who have been excluded from support. These people have endured the last 10 months with no support and no way of earning money because many of their businesses have been shut down under the Covid-19 restrictions. Alongside these challenges, at the same time as announcing SEISS, the Chancellor suggested that this move would probably mean a rise in taxes for the self-employed at some point. 

The tax system

A recent report by the Institue for Fiscal Studies (IFS), [IFS Briefing Note BN316: Who is excluded from the government's Self Employment Income Support Scheme and what could the government do about it?] argues that the self-employed and small business owners should pay as much tax as the employed. They also argue that the tax system is not fit for purpose, at least we can agree on one of those points.

Employees receive far more in benefits from national insurance contributions, employment rights under the law and employee benefits bestowed by the employer and, not to mention, pension contributions. Although, I’m sure the IFS and others would argue that this is irrelevant to the tax system, as is risk. In the real world, it is not, as we have seen these benefits (or lack of) affect the lives of millions. 

Ordinarily, I have the greatest respect for the IFS but, on this, I fundamentally disagree. Much like the syllogism of the classical philosopher Aristotle, the IFS’s proposal is a logical argument that ends with a conclusion that may well invalidate itself.  The economists compute that if a self-employed person is sitting next to an employed person that, somehow, they are doing the same job so should be paying the same tax. That is a perfect example of a syllogism, the problem is the conclusion is not only invalid but sets a dangerous precedent. 

According to the IFS, the government are losing ￡15bn in tax revenue annually through the self-employed paying less tax. Their examples cite a self-employed partner in the financial services industry on an average salary of ￡308,000 and a job earning ￡40,000. This is hardly representative of a sector where the average income for a self-employed person has dropped significantly over the last ten years and is approximately ￡15,000 a year. In contrast, the median annual earnings for full-time employees in the United Kingdom was roughly ￡31,000, so double that of those in self-employment in 2020.   

Despite my usual respect for the IFS, it is even more worrying that it is choosing to release this report just before a Budget that comes in the midst of a global pandemic where most can ill-afford a tax rise. 

Gaps in Support APPG

As I have argued above, the self-employed, small business and the ￡1.6 trillion which they represent will be a vital engine for economic recovery. This is in spite of the challenges which these people have faced over the last 10 months. The situation confronting the self-employed and small businesses has, however, also been seen by many in Parliament. The All-Party Parliamentary Group (APPG) for Gaps in Support of 262 MPs (one of the largest APPG’s in the history of the UK) is currently trying to work with the government to provide more help for the 3-4 million excluded.  

I have, in conjunction with the APPG Gaps in Support , outlined for the Treasury how this might be done using the schemes I drafted such as the Director’s Income Support Scheme (DISS) and the Targeted Income Grant Scheme (TIGS). Both TIGS and DISS have received unanimous backing from the APPG.

Deciding to act would not only support economic recovery but would help many in the self-employed and small business sector rebuild and pay into a tax system to which they have always contributed.  Either way, the Chancellor is in the unenviable position of having to adjust the tax system to somehow make up for the substantial losses during the pandemic. 

Despite this encouraging work by the APPG, the Chancellor’s suggestion in March 2020 to raise taxes on the self-employed (which is now supported by the IFS report) is unconscionable. Excluded from support, the ‘have nots’ will now have to pay for the ‘haves’. Those 3-4 million plumbers, drivers and other gig economy workers (to name just a few) who have not been helped will have spent all their savings, their pension pot and will probably be behind on the mortgage or in debt.   

Limited company directors

This applies equally to the directors of small limited companies who have had very little help during the pandemic. Despite offering the Treasury the DISS, there is still no support and there is talk of raising the rate of corporation tax from 19% to 23%. This again will have a direct impact on a sector that was excluded and is now expected to pay for those who did have support, many of whom benefitted handsomely. 

PAYE Freelancer

This pandemic has highlighted some critical issues for the self-employed and small business sector. There is, for example, the PAYE Freelancer who identifies as a self-employed person but, also may work as a freelancer for a client who pays them on-payroll. This means that they pay tax as a ‘deemed employee’, but they are not an employee and have no employment rights. They have been excluded from SEISS because they do not earn 50% of their income from self-employment and denied furlough because they are not an employee.   

Off-payroll working (IR35)

This is just one example, there are many other cases of a cracked tax system. In April 2021, the so-called off-payroll working legislation will finally be in force having been delayed because of the pandemic. Under this legislation, those people who are assessed as being ‘employed’ for tax purposes will again be paying tax as a ‘deemed employee’ but they are not an employee and have no employment rights. Nor, incidentally, do they receive the benefits as an employee for their contribution to the National Insurance Fund. As an alternative, the client may require the worker to contract through an Umbrella company. This sees the contractor paying not only employment taxes as an employee but, they are also charged the National Insurance Contribution (NICs) for the employer at 13.8%. The client gets charged nothing. 

Limb 'b' workers

On the opposite side of the spectrum are the so-called limb ‘b’ workers. These are the people who have been emerging in the Gig Economy and taking tribunal action in their droves. Couriers, plumbers and now Uber drivers, have all been given basic employment rights as a worker but, at the same time, they are paying tax as a self-employed person. The ‘employer’ here does not pay the employers NICs at 13.8%. 

The deemed employee

So, when designing a new tax system, thought must be given not just for the tax revenues (as the IFS report seems to suggest) but, for the welfare of the people. 

The ‘deemed employee’ is not an acceptable status in our society in 2021.   

As I have already said, these are just some examples of a cracked tax system. This system has seen millions placed at a disadvantage in the current climate. As a result, I feel that we should not stand by and potentially watch these same people be thrown further into the financial wilderness with the upcoming Budget. Instead of penalising them, the Chancellor will need the self-employed and small business sector more than ever to drive economic recovery. To do this can the Chancellor commit to helping the self-employed and small businesses in their greatest hour of need?  

Economic recovery

Finally, it is worth reminding ourselves, once again, that 99.3% of the business population operates as either self-employed or small businesses. Whatever comes with the Chancellor’s Budget on March 3rd it is important to remember (as I am sure he does) that his decisions will affect the lives of millions of people. Perhaps, it is time to look to the self-employed and small businesses to be the stems on which the UK’s economic recovery can bloom and, perhaps, it is time to recognise that the ‘deemed employee’ should not be the ‘damned employee’.