The freelancing revolution is being destroyed by a deep distrust of the self-employed
Now is the worst possible time to hit the sector with red tape and punishing taxes
Few could have predicted our labour market would prove so resilient during the pandemic. Then again, fewer still could have expected the furlough scheme would remain in place for 18 months and come with a £70bn price tag.
None the less, yesterday’s data from the Office for National Statistics painted a broadly rosy picture. With the employment rate for November-January rising and the unemployment rate falling, it seemed economic activity had fully returned to pre-Covid levels.
But all was not necessarily positive. At the start of the pandemic, five million people were self-employed in the UK, making up 15pc of all those in work. The pandemic slammed the brakes on this growing sector: 835,000 fewer people are self-employed than at the start of 2020. In so far as our politicians read beyond the headlines, it’s difficult to know how they will greet this news.
While elected representatives have long taken a keen interest in the self-employed, they’ve been conflicted as to whether this group are tax dodgers shirking obligations to their fellow citizens or victims trapped in poorly paid and insecure work.
For years, they’ve talked about the importance of the self-employed – the “grafters, roofers … and plumbers” – while trying to abolish the benefits of self-employment and turn those same people into employees.
Part of the problem stems from a failure to grasp that the self-employed are a diverse group with enormously varied motives for working for themselves. Two thirds are men. Prior to the pandemic one in 10 were over-65, compared with 3pc of employees.
Some prioritise independence over simple monetary rewards. Others see it as a springboard into entrepreneurship. Many view it as a stepping stone into formal employment, though older workers may use it to transition into full retirement. Ethnic minorities, building business opportunities servicing their specific communities, have a competitive advantage that they don’t possess in mainstream markets.
Not even our current Chancellor can pick a side. When Rishi Sunak announced additional support for the self-employed back in 2020, he hinted that they would be taxed more heavily in future. It wasn’t clear why the Self-Employment Income Support Scheme would come with strings attached, when no such conditions were applied to the excessively generous furlough scheme, but he is already following through on the threat.
Early last year the Government implemented controversial reforms to IR35 that made private companies determine an individual’s tax status rather than the individual themselves. While seemingly minor, the change has had far-reaching consequences for thousands of freelancers and may have been partly responsible for falling numbers of HGV drivers, with many choosing to leave the risks of self-employment behind and switch to safer employment roles as, say, bus drivers.
Though it’s easy to see why politicians are often instinctively hostile towards the self-employed – after all, tax is easier to collect if the employer sends it off under PAYE – what’s harder to understand is why the Government is choosing now to hammer this once-booming sector of the UK economy.
Already, the self-employed are among those worst hit by Covid; across the globe Uber saw customer numbers slashed by 40pc in April-June 2020, for example. Pimlico Plumbers saw revenues dip by £2m in the first lockdown.
Perhaps the long-standing Treasury and HMRC suspicion of self-employment has been intensified by sheer desperation. With the budgetary outlook growing increasingly gloomy, the Chancellor is running out of taxes to hike, and here’s a group of workers who not only pay lower National Insurance contributions, but have greater opportunities than the employed for under-reporting income and over-stating expenses.
Yet at the same time as the self-employed are viewed as privileged by the tax system, they are paradoxically also seen as disadvantaged. They lack access to a number of welfare benefits and workplace protections that employees take for granted.
While it is true that those working for themselves have remained largely insulated from the expansive pieces of employment regulation conceived over the past two decades, this is by no means necessarily a bad thing.
The state now compels businesses and employees to accept their preferred practices on hiring and firing procedures, entry into pension schemes, the number of holidays, sick pay, maternity pay, the number of hours that can be worked regardless of the impact on the individual employee and business. Self-employment affords individuals a degree of independence from the creeping employment rules and regulations (and HR gold-plating) that dominate so many jobs.
Yet politicians of all stripes are insisting “something must be done”. When the Labour Party last summer unveiled its new plan for workers, it promised to strengthen rights and protections for the self-employed, including a ban on zero hours contracts. When the UK Supreme Court ruled that 70,000 Uber drivers would be offered holiday pay and the national living wage, the Business Secretary warmly welcomed the news.
So the pincer movement of higher taxes and greater regulation on the self-employed seems inevitable – and the trend that was triggered by an unprecedented health crisis will be carried forward by ill-conceived, one-size-fits-all policymaking. Regulation often has significant and perverse downsides, no more so than when it is introduced with little consideration of whom it is designed to help and why.
Has anyone in government asked workers if they value flexibility and control over traditional employment rights? Because Uber has – and found they overwhelmingly do. Analysis by the Institute for Fiscal Studies has shown self-employed workers earn less but are “happier and healthier” than their counterparts on company payrolls.
If the Government isn’t already paying the price for its treatment of these workers, it may well be soon. Raise the cost of doing business and it follows that less business will be done. And less business being done will leave our fiscal hole even deeper.
Annabel Denham is the director of communications at the Institute of Economic Affairs
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