Contractors in the UK are not alone, as their counterparts worldwide are facing the same issues of hostile tax regimes, over-regulation and lack of political understanding about the contribution freelance professionals make to their national economies.
That was the key message from guest speakers at an invitation-only PCG Round Table Event held earlier this week and attended by key speakers, politicians and contracting sector stakeholders, including ContractorCalculator CEO Dave Chaplin.
“Contracting in the UK is a far from isolated case,” explains Chaplin. “The ‘third way’ of working, that between employment and self-employment, is not properly recognised in most countries. This means that labour, business and tax laws are frequently drafted without taking into account the unique characteristics of contractors. PCG’s event identified that legislating appropriately for contractors is a global challenge.”
Why the European Social Model is important
Chaplin explains that the so-called ‘European Social Model’ is the source of many of the current challenges facing the contracting sector: "Employment legislation in the UK is ultimately driven by the European Commission (EC) and the European Parliament. They drive the legislation in most European member states, and therefore the EC, European Parliament and employment legislation have come to be explained as the European Social Model (ESM).”
The 'third way' of working, that between employment and self-employment, is not properly recognised in most countries
Dave Chaplin, ContractorCalculator
Because the ESM focuses on social protection, social welfare and justice, equality and workers’ rights, the result is a legislative framework that accounts for employee and employer needs, largely ignoring those in between, such as the self-employed, freelancers and contractors.
“If future UK legislation is to allow for the unique needs of contractors, then the contracting sector needs a voice in Brussels,” says Chaplin. “PCG is doing just that on behalf of its members and the wider contracting sector.”
Taxation and disguised employment
“Although different countries are at varying stages of legislating for contractors, there are some convergent themes,” explains Chaplin. “Differentiating genuine contractors from disguised employees and how contractors should be taxed are clearly the major challenges, and differing approaches have been adopted.”
Canada’s tax agency, Canada Revenue Agency, applies a four-point test that asks about control, ownership of tools, financial risk and ‘part and parcel’ issues. In Australia, contractors are asked to pass the Personal Services Income (PSI) tests. These are based on a requirement that contractors are paid on project completion, provide their own tools, and rectify defects at their own expense. If any of these tests are failed, contractors then face a battery of further questions.
‘Flexicurity’ – encourage growth, but with a safety net
Speakers at the event highlighted that even the proponents of the European Social Model recognised that growth is an essential component of a healthy economy. It therefore followed that in order to encourage growth, risk must be rewarded; this is generally achieved with tax breaks, but that is when there start to be conflicts with the core social welfare component of the ESM, and issues like disguised employment come to the fore.
“All countries seem to want to promote ‘flexicurity’ and encourage growth through tax incentives, but then have the same problems when it comes to disguised employment,” continues Chaplin. “Whether it’s called IR35, PSI, or anything else, all countries face similar issues. They seem to want to put people into one of two camps: employer, or employee – as opposed to contractor or freelancer, which so many people are.”
Commending PCG’s national and international role
The PCG Round Table, called ‘Shaping the freelance landscape: International Perspectives’, was held at the Royal Society of Arts (RSA) on Monday 12th July 2010. Speakers included Emeritus Professor of Law Patricia Leighton, Dr Tui McKeown of the Independent Contractors of Australia, Michael Wynn of Kingston University, Don Koulaouzos of Skytrek and PCG’s managing director John Brazier.
Chaplin concludes: “PCG is to be congratulated for its efforts to both represent the UK’s contracting sector at home, in Europe via Brussels and on the international scene. Events like this Round Table highlight the challenges we face in raising awareness of contractor needs, and the contribution they make in return to the prosperity of the UK and global economies.”