The state of self-employment

The conjunction of the deadline for self-assessment tax returns and the start of my 21st year as a freelance has got me thinking about self-employment.

Like most people I’ve found there are good and bad sides to working (at least in theory) for yourself. The feeling of not being tied to one particular employer and of (at least in theory) being free to do anything you want are both potentially liberating. Not being dependent on one organisation for your living should mean you’re better off than its employees in a downturn (at least in theory). You can offset your (legitimate, please note, HMRC) expenses against income and if you are more high-powered than me you can even found your own personal service company and employ yourself. A combination of self-employment and technology has enabled me to live and work in a part of the country where reasonably paid full-time jobs are a rarity.

On the downside, if you work mainly at home self-employment can leave you isolated from the sort of workplace life that everyone takes for granted. If you work mainly inside workplaces a thick skin is sometimes required when you have to watch complete idiots take charge (in my case thankfully not for several years, I hasten to add!). If you’re doing well, your leisure time can get squeezed. If you’re doing badly, it will be spent worrying that someone will pay you on time to pay the bills. You have few legal rights, though I’ve only been let down badly a couple of times and the rights of employees are steadily disappearing too. Your debts may well be higher than those of an employee. And if, say, a government comes along determined to cut public spending in the middle of a recession you can find sources of income rapidly drying up because the freelancers are the easiest people to cut. Thanks, George!

But enough about me: what about the state of self-employment as a whole?

My first freelance contract back in 1993 was a study of self-employment in the UK construction industry for the International Labour Organisation. No other major industry has a greater proportion of its workforce self-employed. That’s not so surprising when you consider the number of jobbing builders out there who are often working on their own, but maybe more so when you look at those working for major companies on big construction sites. In the 1990s, unless the company involved had an old-fashioned view about direct employment or the unions were especially powerful in a particular area, the norm was for work to be subcontracted and risk passed down the line until it eventually reached individual self-employed workers at the bottom.

Based on the standard test of whether someone is employed on a contract of service or self-employed on a contract for services, I concluded that most of the so-called self-employment was bogus and that the workers involved were employees. Losses to the taxpayer (especially in employer’s national insurance contributions) ran into hundreds of millions of pounds a year. Later in the 1990s the Inland Revenue made concerted attempts to bring bogus self-employment under control but with mixed success. Many legitimate companies wanted to comply but still found themselves being undercut by competitors who did not.

Just before Christmas the construction union UCATT published a report that indicates that not much has changed over the last 20 years apart from the sophistication of the tax and national insurance avoidance. The report describes how construction workers are forced to sign contracts with payroll companies to obtain work but are officially classed as self-employed. Another report from the union estimated that there are 400,000 bogus self-employed construction workers (about half of the total) and that the annual cost to the Treasury is £1.9 billion, including £1.2 billion in employer’s national insurance contributions.

The financial incentives are such that it seems hard to believe that the same thing is not happening in other industries. Some of the 330,000 increase in self-employment since the start of the recession will be down to former employees striking out on their own as organisations close down but how much of the rest is down to out-sourcing, sub-contracting and employer pressure? How much of it could even be down to welfare to work contractors finding a neat way to get people off job seeker’s allowance?

In 1995 (the earliest year I can find in the ONS stats) I was one of 3.6 million self-employed people. By 2000 that had fallen to 3.2 million, with numbers in the construction industry falling by 150,000 or so in the face of the tax clampdown. Total numbers rose through the 2000s to reach 3.8 million by the start of the recession, of whom 900,000 were in construction. In the four years since, despite a collapse in construction and a fall in the numbers in that industry, the total number of self-employed people has risen to 4.2 million.

When the latest employment statistics were published last week, the TUC noted that this 9 per cent rise in self-employment contrasts with a 1 per cent fall in employees since the start of the recession. Since early 2010, 40 per cent of the new jobs created have been self-employed ones, with the biggest increases coming in administrative and secretarial work (up 52 per cent), sales and customer service (up 32 per cent) and personal service occupations like hairdressing, cleaning and caring (up 31 per cent). Detailed tables are here. As new TUC general secretary Frances O’Grady put it:

‘More than in one in three new jobs created since 2010 have been self-employed roles. It would be naïve to think that these are all budding entrepreneurs. Worryingly, the figures suggest that many of those who have lost their jobs over the last few years are not simply choosing to go freelance, but are being forced into false self-employment, which is often insecure and poorly paid.’

That impression is backed up by the much bigger increase in self-employment among women (up 19 per cent over the last four years to 1.2 million) has than men (up 7 per cent to 3 million) when women are much more likely to be part time. Overall, there are now 1.2 million part-time self-employed people, compared to 3 million who are full-time.

You’d have thought that these part-time workers with no rights were the real ‘strivers’. However, ministers at the Department for Work and Pensions (DWP) appear to believe that part-timers in general are only working hard enough to qualify for tax credits. Employment minister Mark Hoban told a Policy Exchange event last week that the current system allowed people to pursue hobbies, earn nothing and get tax credits ‘without any expectation that they will increase their earnings and move towards self-sufficiency. This flies in the face of a principled welfare system’. For a response from someone part-time and self-employed, see this blog by Bernadette Horton.

The universal credit is intended to increase incentives to work extra hours by reducing the amount people lose from their benefits and tax credits when they earn more. However, the Chatered Institute of Taxation’s Low Incomes Tax Reform Group has attacked the design of the new system as a ‘massively retrograde step’ for the self-employed. For starters, they will have to submit monthly accounts to the DWP with payments suspended if they fail to comply. The LITRG describes this as ‘in practical terms impossible’ given the information that has to be gathered. Second, they will still have to submit accounts to the HMRC, but on a different accounting basis with different rules on deductions. Third (and I know this from my own experience) how you do in one month bears no relation to how you might do in the next. Add to those complications the possibility of a ‘Gateway Interview’ when you first declare that you are self-employed – something that, as Johnny Void points out on his blog, sounds like some sort of Stalinist Dragon’s Den.

However, the rules on ‘gainful self-employment’ and the ‘minimum income floor’ sound even more serious. The first seems designed to hit the alleged hobbyists and means that you will have to work at your self-employment for at least half the expected number of working hours or else accept work search and conditionality requirements that take no account of your self-employment. According to LITRG that will effectively prevent part-timers from building up their business.

The second will apply after a one-year start-up period. Self-employed people who are expected to be able work full-time will be assessed as though they earn at least the national minimum wage for the hours they work, regardless of how much they actually earn (more detail on that in guidance to the regulations here). Given that one of the attractions of bogus self-employment for employers is the ability to evade inconveniences like the minimum wage, that could have a severe impact on the lowest paid.

As self-employed people all over the country sweat on that last-minute tax return, the sector looks to be thriving on the surface. Look a little deeper though and, as with so much else to do with the economy, the labour market and welfare reform, the prospects look increasingly uncertain for those at the bottom.

For an update, see my post on Accounting for the new self-employed


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