Unfair tax rises on the self-employed will harm the whole economy

Parliament has come back with a bang this week, and if you work for yourself, it hasn’t been a welcome one. The Chancellor has wasted no time in laying the groundwork for his Budget this Autumn, at which, if recent press articles are anything to go by, he will unveil a slew of tax raising measures, many of which will impact the self-employed – limited company contractors and sole traders alike.

Treasury (600x400).jpg

This was partly expected. When the Chancellor announced the Self-Employment Income Support Scheme (SEISS) in March he strongly hinted that those benefiting from the scheme will see their tax bills rise:

“But I must be honest and point out that in devising this scheme … it is now much harder to justify the inconsistent contributions between people of different employment statuses.” Rishi Sunak, March 2020

Nevertheless, there are a few strong arguments to say this is neither fair, nor particularly sensible.

Why tax increases for the self-employed should not be introduced

  1. Not everyone benefitted from SEISS. Even if we leave ltd co directors to one side for a moment, not even all sole traders were supported. If you had been trading for less than a year, previously had profits above £50k, or earned less than 50 per cent of your total income from your self-employed business, you were ineligible. No taper, no partial support – just straightforward exclusion.

    According to the government’s own data 3.4 million self-employed were eligible for SEISS (of which just 2.6 million actually claimed). The remaining 1.6 million were ineligible for the reasons listed above.

    Any tax rise – almost certainly in the form of an increase to Class 4 National Insurance (which is tax under a different name) – will impact this excluded population just as much as those who benefitted from SEISS, which makes it much harder to justify.
  2. Limited company contractors did not benefit from SEISS either, and they have had little support from other schemes too. The Job Retention Scheme (JRS) was available for company directors (and still is, though not for new claimants) but it didn’t take account of dividend income and it imposed highly restrictive furlough rules, which prevented contractors from doing any work at all.

    Of course, ltd co contractors pay tax differently to sole traders, so surely the Chancellor wouldn’t seek to impose a rise on them? Alarmingly, this isn’t the case, as officials have been busy briefing journalists of a potential hike in Corporation Tax – and a significant one at that – from 19 per cent to 24 per cent. It should be stressed that none of this is confirmed, but when it comes to tax speculation in the media, the old axiom ‘there’s no smoke without fire’ is often proved to be accurate.

    Of all the groups that have struggled through the economic collapse brought on by coronavirus, small company directors have arguably had the worst of it. For many, demand has fallen off a cliff edge, they haven’t been able to access the grants that others have and instead have been encouraged to take out Bounce Back Loans – money that will have to be repaid. Now, they are being targeted with a big tax rise, just as they hope to start rebuilding their businesses. And let’s not even start on IR35, which will unfairly remove hundreds of thousands of legitimate businesses from Corporation Tax altogether and dump them in punitive and completely inappropriate payroll arrangements.
  3. It’s not just about fairness – it’s about doing what’s needed to rebuild the economy. In a recession, we would normally expect a jump not a slump in the number of self-employed, as businesses look to the flexible expertise they offer. However, recent ONS stats showed that the number of self-employed fell by a record 238,000 in the second quarter of 2020.

    Rumoured tax hikes will do little to encourage people to strike out on their own and drive the growth that is needed. Businesses left in a fragile state by the recession – particularly the ones that received little or no support – may well fold under renewed tax pressure from the Exchequer.

    As IPSE CEO, Derek Cribb said recently, “with government policy driving down the number of self-employed, there is a real fear the UK workforce will become brittle and rigid just when it needs to be at its most agile.”

The economic recovery will be powered by the UK’s smallest businesses – those who work for themselves – but only if the government creates the right conditions for them to do so. Significant increases in the taxation of these businesses will hinder, not help. With so many businesses hanging on by a thread as a result of the pandemic, now is not the time to hit them with a tax hike, but to nurture and support them so they in turn can fuel the recovery.

This is the message IPSE will be taking to select committees, civil servants and government ministers over the coming months.

Meet the author

Andy Chamberlain

Director of Policy and External Affairs