Taxation for freelancers: a background
IPSE believes the tax system should reward enterprise. A competitive tax system with low rates of Corporation and Income Tax is good for the economy.
We believe the tax system is currently ill-equipped to cope with the modern labour market and the commercial realities of small business. In particular, HMRC need to adopt a more business-friendly approach to taxpayers, sympathetic to the current economic climate.
Information provided by HMRC must be clear, unambiguous and easy to follow. The Office of Tax Simplification (OTS) and the IR35 Forum are welcome steps towards a tax system which can provided the simplicity and clarity needed for businesses. The links on the right hand side of this page detail the specific issues IPSE has with the tax system, particularly with regards to IR35.
Why does the taxation system fail to deliver?
The UK’s tax system is still based on the outdated principle that everyone is either an employee or an employer. It has failed to keep up with changes in the world of work, or with the development of a flexible labour market.
Though there is a ‘self employed’ category in the tax system, it is not always the most appropriate option for those who work for themselves.
As a result, the tax system is ill-equipped to deal with freelancers (nano-businesses). Whilst recent changes have heralded more positive, business-friendly approaches further changes are needed, particularly in the attitude and approach of HMRC.
The behaviour of HMRC has been historically poor. Policies such as IR35 have shown a commitment to collecting the most, not the right, amount of tax from businesses and a lack of understanding about commercial realities and regulatory burdens.
IPSE supports business-friendly taxation. A competitive tax regime with low rates of Corporation Tax and Capital Gains Tax encourages investment and growth in the UK economy, which benefits all businesses including freelancers. The tax system should deliver clarity, certainty and consistency. Freelancers have been let down in these areas.
IR35: A clear need for simplification
IR35 is a prime example of the failure of tax law to recognise freelancing. IR35 is a tax law introduced in 1999 that treats fees paid to a limited company as salary. It was designed to stop disguised employment, but it has had a severe impact on the freelance community. Long investigations and a total lack of clarity for freelancers to understand whether the rules apply or not has made the policy extremely damaging for the flexible labour market. IPSE believes IR35 should be abolished or radically simplified.
Instead the government has recently chosen to tighten IR35 rules for freelancers operating in the public sector a move that will ultimately harm the government’s own departments’ ability to attract expertise.
HMRC: A brake on enterprise
HMRC has often been seen by businesses, including freelancers, as a brake on enterprise. Rules and requirements are often seen as overly burdensome or expensive to comply with. HMRC can appear out of touch with the commercial realities of business.
Evidence from the IR35 investigations IPSE is involved with show often wildly varying interpretations or attitudes amongst HMRC tax inspectors. Tax law must be applied consistently so businesses can have certainty about their affairs. In addition to long, intrusive, expensive and often misguided IR35 investigations, policies such as the renewed focus on “Business Records Checks”, or the switch to “iXBRL” filing can also be damaging to businesses. Measures such as these appear to punish businesses trying to do the right thing and create additional costs in the face of economic hardship for many businesses. HMRC’s Charter, published in 2011, was a positive first step towards resolving many of these issues, by laying down a clear framework for what taxpayers can expect from the body. Initiatives such as the “Time to Pay” scheme are also welcome moves towards rebuilding trust in HMRC.
The IR35 Forum, established by the Government to develop a ‘new way forward’ on IR35, is also a scheme which IPSE believes has the power to greatly improve the business environment for freelancers.
The Office of Tax Simplification (OTS)
The Government established the independent Office of Tax Simplification in 2010 to suggest ways of simplifying the UK’s tax system.
IPSE believes the Office of Tax Simplification has the potential to be a positive force in suggesting future tax policy and has been working with the body to develop a simpler tax system.
The IR35 Forum came about as a response to the OTS’s report on Small Business Taxation. The OTS also recommended a full merger of NICs and Income Tax. Whilst IPSE believes this would entail considerable practical difficulties, IPSE acknowledges that this would deliver a solution to the issue of IR35.
IPSE looks forward to continuing to work with the Office of Tax Simplification.
As an effective lobbying organisation, IPSE has been an active voice for a tax system that recognises the UK’s freelancers as a vital part of the business landscape. IPSE maintains a dialogue with Treasury Ministers and senior Civil Servants, to ensure the views of the UK’s 1.9 million freelancers are taken into account.
IPSE sits on the IR35 Forum and also works with the Office of Tax Simplification ensuring it has a seat at the heart of the decision-making process.
IPSE backs its members in court and tribunal cases to bring clarity to tax law. It also provides an extensive range of tools and advice on tax for its members.
IPSE believes in working with the Government and HMRC to achieve clarity, certainty and consistency in the tax system for the UK’s freelancers.