Self-Employment Review: why defining self-employment plays into the taxman’s hands

Contractors and freelancers could enjoy many benefits from a legal definition of self-employment, but all of a sudden HMRC will find it much easier to target this sector and the result will almost certainly be tax hikes.

The Department for Business, Innovation and Skills (BIS) released its Self-Employment Review recently. Led by Julie Deane OBE, the report flagged up numerous issues affecting contractors and the self-employed, including the need for more resources for freelancers and greater public sector engagement.

However, the most prominent recommendation - from a contractor’s point of view at least – was the call for a legal definition of self-employment. This, Deane claims, would help to achieve “simplification and clarification” with regards to tax and employment law.

At first glance, the concept seems sound. Every contractor would love certainty over their liabilities when it comes to tax and National Insurance Contributions (NICs). But whilst it would appear to make life easier for the contingent workforce, it would even more so for HMRC.

The bottom line is simple. Policymakers find it much easier to target specific groups – and generate new ways of taxing these groups – when they are identified in law, because it makes them easier to define in tax legislation.

Our concern is that a single legal definition of self-employment may well encompass contractors. And with the contingent workforce having occupied a permanent spot on HMRC’s tax radar as of late, who’s to say the taxman won’t jump on another opportunity to claw in more tax from this sector?

Contractors have long compensated for a lack of employment rights and protections – such as holiday pay and maternity pay – by adopting tax efficient working arrangements.

The taxman is evidently attempting to phase out the benefits of such arrangements. The latest example being the looming tax hikes that limited company contractors are set to suffer on their dividend income. Do freelancers really want to give HMRC a helping hand with a legal definition of self-employment?

Every contractor wants a more simplified tax system, but there’s no point in striving for one whilst simultaneously overlooking the complexities of the working arrangements of the contingent workforce.

There are a lot of blurred lines when it comes to contracting, and whilst it can often be a pain, sometimes it plays into the contractor’s advantage. This is one of those occasions.

The complex nature of flexible working is part of the reason why the tax system is complicated in the first place. If contracting was black and white, HMRC wouldn’t be continually tampering with its IR35 legislation, because it would already be clear as day who is employed and who isn’t.

Similarly, the difficulties thrown up when attempting to accommodate numerous contracting trading vehicles under one definition could prove to be advantageous for contractors.

We have sole proprietorships, partnerships and limited company contractors – the latter of whom are already technically defined as employees of their company. On top of this, there are umbrella company contractors to account for, who are also employed.

To create a definition that bands all of these groups together – let alone one that bands them together with the wider self-employed community as a whole – seems near enough impossible. Surely any attempt to do so wouldn’t convey an accurate portrayal of each trading vehicle.

Any all-encompassing definition of self-employment would also bring us back into subjective test territory again. From a tax perspective, and any other perspective for that matter, individual circumstance would be overlooked as everyone would be viewed merely as ‘self-employed’. We want greater simplicity, but this would be a step too far.

An alternative solution would be to allow workers to determine whether or not they are ‘self-employed’. If they choose to fall into this bracket, they should understand everything that it entails. This way, nobody is being forced into a way of working that they don’t agree they should be subject to.

Aside from defining self-employment, it’s true that the self-employed do need more protections. Late payment, as highlighted within the review, is a major problem for many contractors, and more government support is needed in terms of reducing red tape and providing resources.

However, we need to be careful to ensure we don’t narrow the divide between employment and self-employment too much. If you choose to go it alone, a certain sense of accomplishment comes with that being the case.

It’s a good thing that contractors are prepared to stand up and take the risk based on the confidence they have that they are valued highly and will be able to source work off their own back. It keeps people sharp and it’s a major reason why the self-employed are becoming an ever-increasing driving force behind the UK economy.

There’s a certain ‘survival of the fittest’ element amongst the freelance community, which makes it unique. One can wear a badge with pride, knowing they can get work based solely on ability. Providing freelancers with too many employment protections would only dilute the quality of the freelance workforce and weaken this concept.

Published: Tuesday, February 23, 2016

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