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Tax and regulatory changes needed as contractor confidence plummets, says IPSE

For many years, flexibility has been one of the UK economy’s main competitive advantages. And particularly with Brexit on the horizon, the Government needs to actively protect this flexibility, or else risk harming not just the contractor community, but the economy as a whole.

This is the verdict of Simon McVicker, director of policy at the Association of Independent Professionals and the Self Employed (IPSE), who also warns about the impact recent Government measures could have on UK contractors.

“I’m worried the Government is trying to prevent people from working in a flexible way. Recently, it’s put the gig economy under intense scrutiny and made much of the concept of false self-employment. Taken together with the recent changes to taxation – most notably the public sector IR35 reforms – it’s almost as if the Government is intent on making it extremely difficult to be self-employed.”

Contractor confidence slumps to lowest levels on record

McVicker’s comments come after IPSE’s Freelancer Confidence Index for Q2 2017 showed the poorest outlook on record. The latest figures reveal that only 19% of freelancers are confident about how their business will perform over the next 12 months, down 9% on the previous quarter.

52% of respondents also said they now have less overall confidence in their business performance than before. There seem to be two main reasons for this slump in confidence, which McVicker says need to be urgently addressed: Government tax regulation policy, and Brexit.

Government is doing little to tackle contractor mistrust

“I think there’s a general mistrust of the Government at the moment. You get the impression not just that it doesn’t understand the self-employed, but that it’s actually unsympathetic towards them too.”

McVicker points to the public sector IR35 reforms and the Chancellor’s botched attempt at increasing National Insurance Contributions (NICs) for the self-employed as examples of recent measures that have diminished contractor confidence.

This echoes findings from ContractorCalculator’s own IR35 survey, which shows that around 27% of contractors have chosen to leave the public sector because of the reforms, while another 17% are now considering leaving. Against this backdrop, McVicker warns that the impact of the reforms looks likely to hamper public sector projects for the foreseeable future.

“I don’t think the new regime is going to work as well as the Government expects. I don’t think it will bring in the anticipated revenue. When a project is postponed because of contractors leaving, it means other contractors will need to be drafted in further down the line. Whether or not they will be available remains to be seen.”

IR35 in the public sector: ‘HMRC living in a parallel universe’

The Government’s contradictory approach to self-employment in the public sector, McVicker suggests, is becoming a serious threat to contractors: “They seem to be saying one thing and doing another. The Government has developed an industrial strategy that will rely heavily on small companies and freelancers with specialist knowledge. In the supply chain, however, it is creating an environment that is less and less accommodating to these companies.”

HMRC is yet to acknowledge the problems caused by the changes to IR35 in the public sector. In fact, McVicker notes that HMRC was curiously positive about the immediate impact of the reforms at a recent IR35 Forum meeting.

“HMRC is telling ministers that everything is alright. It seems to be living in a parallel universe, where it doesn’t recognise the problems that are evident to everyone else. It may well be that Government departments aren’t reporting the truth to HMRC. If that’s the case, the penny will drop when projects start failing to meet deadlines.

“The response from HMRC will be that these are early days, and that a long-term perspective is needed. They still see IR35 as a relatively new tax and, unfortunately for contractors, they’re clearly prepared to just tweak it and introduce changes where they see fit.”

Brexit could yield opportunities for contractors

It’s clear the Government’s approach to taxation has caused significant damage. Less obvious, however, is the damage caused by Brexit, the second major factor affecting freelancers’ confidence. McVicker says the economic uncertainty created by Brexit is negatively impacting confidence, but suggests that in the long-run, Britain’s departure from the EU could actually create opportunities for freelancers too.

“In some ways, I think Brexit is going to be a big opportunity for UK freelancers. If we implement the immigration controls that are being talked about, the UK won’t have the skills needed for a lot of jobs, so all of a sudden there will be a lot more demand for the flexible workers who remain.

“So I think this pessimism is largely an immediate gut reaction to Brexit. But if there are more opportunities two years down the line, contractors may well change their minds on that.”

However, as McVicker highlights, there will only be opportunities for contractors and freelancers providing there is still flexibility in the UK workforce.

“The Government must make sure the UK economy remains flexible. For some time now, flexibility has been the UK’s key competitive advantage, and you would have thought the Government would be intent on sustaining it.”

He concludes: “But instead, it seems to be trying to regulate and tighten the labour market, forcing many people out of self-employment. It’s a great concern not just for the self-employed but for the country at large.”

Published: 05 September 2017

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