IPSE's plan to boost the labour market and support the self-employed
- 02 Feb 2023
- Fred Hicks
We’ve got used to governments breaking with tradition when it comes to major announcements on the nation’s finances. The short-lived increase to National Insurance was announced outside of the usual tax raising window offered by a Budget. In October 2022, we were treated to a ‘mini-budget’ and a ‘medium-term fiscal plan’. And it wasn’t long ago that then Chancellor Rishi Sunak was revealing new policies on his Twitter feed days before he was due to announce them at the Budget, much to the Speaker’s annoyance.
But as Jeremy Hunt made clear when announcing his plan for growth at Bloomberg last week, the current Chancellor is keen to return us to our tried and tested fiscal conventions. Not giving anything specific away ahead of the next Budget, Hunt set out the four ‘Es’ of his plan – “Enterprise, Education, Employment and Everywhere.”
Could self-employment get more people off the sidelines?
For IPSE, it is the third ‘E’ – employment – where we can see a potentially transformative role for self-employment in attracting economically inactive workers back to the labour market, whilst boosting incomes, hours worked and ultimately, productivity.
But this vision can only be realised through a change in direction in government, towards delivering genuinely supportive measures to help self-employment thrive. That’s why we’ve written to the Chancellor ahead of the Budget on 15 March with five ideas to help make self-employment a more sustainable and aspirational choice for the millions who work for themselves, and many more who are considering it.
Remove barriers created by the off-payroll working rules
Addressing the nation’s early retirees in last week’s speech, the Chancellor’s message was “Britain needs you”. But who are these early retirees, and why aren’t they working?
Although by no means the only factor driving an increase in early retirement, an exodus of skilled contractors following reforms to IR35 in 2021 is almost certainly contributing to it. When we surveyed the intentions of freelancers six months on from the 2021 reforms, 11 per cent told us they planned to retire as a result and a further 6 per cent planned to stop working altogether.
If the off-payroll working rules became more proportionate in future, who’s to say that some might not be convinced to return to contracting? It could even inspire others who have struggled to replace a previous employed role to begin contracting for the first time.
That is why we supported the previous Chancellor’s announcement that the 2017 and 2021 reforms would be scrapped; we’ve urged government to reconsider its reversal of this position, and instead consider some of the alternative approaches drawn up by IPSE.
Increase the VAT threshold to £100,000
The turnover threshold at which a business must start charging VAT creates a cliff edge that reduces incentives for many self-employed operators to generate income that exceeds it. It is therefore not uncommon for the self-employed to hang up their tools for considerable lengths of time each year as it is simply better for business. We believe government should treat this lost economic activity with an equal degree of concern as it does with the economically inactive population.
Punishingly high levels of inflation are causing growing numbers of traders to hit this threshold sooner in the financial year. A short-term solution that government could introduce overnight would be to increase the threshold to £100,000; this would not only adjust for inflation, but also provide breathing room for small enterprises to increase their productivity even further.
Review Managed Service Company legislation
Managed Service Company (MSC) legislation – designed to tackle the use of ‘composite companies’ by groups of contractors – became a feature of the tax landscape in 2007. In the period of almost 15 years since, these rules remained uncontroversial, with specific parts of the contractor supply chain given exemptions from the rules to provide specific services, such as accountancy services.
But HMRC’s recent determination of two accountancy services providers (ASPs) in 2022 to be MSC Providers arrived like a bolt from the blue, with disastrous consequences for the ASPs, their staff, and their customers. This investigation – and the lifechanging sums of money demanded from contractors who sought advice from these ASPs for the very purposes of tax compliance – has come as an enormous surprise.
There is growing concern that more ASPs could be affected by similar investigations in future. But we are yet to understand government’s view on these investigations and the approach taken by HMRC in enforcing the legislation. That’s why IPSE has called for government to conduct a review of this legislation to ensure that enforcement is proportionate and in line with the intentions of the legislation, lest even more contractors be motivated to exit the sector or retire early in response.
Boost the trading allowance to £5,000 to support casual self-employment
IPSE research from Summer 2022 suggests that the cost-of-living crisis has given rise to an increase in casual self-employment, as people take to online selling and small freelance projects to boost their incomes.
There’s a fair argument that says this shouldn’t be necessary; that one employment should be enough to live off; and that an increase in ‘side hustles’ is actually a symptom of weak wage growth.
Nonetheless, our research found that 12 per cent of UK employees had a side hustle – a third of whom said that they started it to help cope with the cost-of-living crisis, whilst half said they wanted to increase their income generally. And, among those considering taking on casual self-employment, these motivations were shared by 55 per cent and 65 per cent respectively.
We think government would be remiss not to harness the potential of this increased interest in casual self-employment. For some, a side hustle will be a short-term means of boosting income, and for others it’ll be a way to pursue a hobby whilst earning extra cash – if people have an idea or skill that could bring in more money whilst prices are rising, they should be empowered to pursue this if they are able.
But for others, a side hustle could be the formative stages of what will later become a fully-fledged self-employed enterprise. Whatever the motivation or outcome, we believe casual ventures should be nurtured to their fullest potential.
Lifting the trading allowance from £1,000 to £5,000 would be a simple means of supporting those venturing into casual self-employment. Above all, it would send a clear message that this Conservative government still believes in supporting those who take the bold step of putting themselves out there and working for themselves.
Tweak the Lifetime ISA (LISA) to better serve older workers
If we are successful in encouraging early retirees back to the workforce, particularly to self-employment, we should also make sure that the right products are in place for them to continuing saving for later life. For instance, some may already be drawing down on their pension and may prefer to use a separate saving vehicle.
The Lifetime ISA (LISA) is close to being the ideal product for people in this position – however, age restrictions prevent those aged 40 and over from opening a LISA and prohibit those aged 50 and over from making new contributions.
We believe there is merit in exploring how the LISA could be revamped to ensure that those who choose self-employment as their means of leaving economic inactivity are able to continue saving in a way that is rewarding and flexible enough to meet their needs. By removing the age limit and reducing the withdrawal charge to 20% (thereby removing the penalty), the LISA could become that product.
The Budget and the self-employed
It’s fair to say Budgets have become something to be feared by contractors. It seems that every fiscal event brings a fresh attack on those that work for themselves. Whether it’s cutting the dividend allowance, slashing entrepreneurs’ relief or introducing the IR35 reforms, the clear direction of government policy has been to clamp down on our smallest businesses. This is out of step with conventional Conservative values and in our submission, we’ve appealed to the Chancellor to turn the ship around and return to those values.
We aren’t holding our breath, but we are keeping up the pressure. If the Conservatives want to appeal to their base and have any chance of winning the next election, these are exactly the sort of ideas they should be implementing.
IPSE is at the forefront of research into freelancing and self-employment. We work with our members, leading academic institutions and research agencies to to shed light on the needs and interests of freelancers so we can champion them in government and across industry.
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