Tax and the self-employed

For all the sound and fury over national insurance and the self-employed, it is still a sideshow in wider debates about tax, employment status and rights at work.

Philip Hammond’s unraveling Budget matters politically and it signals both the strength and the weakness of the government. Only a chancellor facing the worst opposition in decades could even consider a measure that breaks four separate commitments in the 2015 Conservative manifesto. Only a prime minister with a small majority could be forced to retreat at the first sign of Tory dissent and newspaper headlines about white vans.

Much of the blame lies with the ex-chancellor now trousering £1m a year on top of his MP’s salary for his advice and speeches. It makes you wonder how George Osborne is being paid for all that hard work and hope that he’s about to get clobbered for tax because it’s through a personal service company.

It was Osborne who in 2015 abolished Class 2 national insurance contributions (NICs) for the self-employed (from 2018) and gave them access to the higher state pension via Class 4. If he had introduced an increase in Class 4 contributions at the same time, few people would have complained. Instead he posed as the great reforming chancellor, agreed the manifesto pledge and left Hammond to fill the holes in his spreadsheet.

Combine these different measures and the treatment of the self-employed looks (reasonably) fair: most of the lowest paid will pay less, there’s a better state pension than before, and the burden falls heaviest on people earning more. But try and defend this week’s Budget announcement using that argument and you look like a shifty betrayer of ‘ordinary working families’ and ‘entrepreneurs’.

Shifty is exactly how Hammond came across when he appeared on the Today programme on Thursday morning. First he tried to argue that the NIC increase would ‘only affect 15 per cent of workers’, an incredible statement that just means all of the self-employed or 4.8m people.

Then he argued (correctly) that most of the impact will be felt by higher earners before spoiling even that by implying that it would only really affect top earners like ‘partners in major law firms’. Leave aside the accuracy of that statement and it also says something else about a much bigger issue.

Why are partners in major law firms self-employed? Are they entrepreneurs who set them up in the first place? Or are they simply the highest-paid employees of firms allowed to get away with paying far less in national insurance because they are self-employed?

The real tax problem with the self-employed is not Class 4 national insurance but Class 1: the 13.8 per cent employers’ national insurance that firms avoid through bogus self-employment.

To talk about ‘the self-employed’ as one group is meaningless. They might be genuine business owners and entrepreneurs. They could be highly-paid workers colluding with their employer to avoid tax.

They could be independent contractors and consultants and freelances who work for several different organisations and sort out their own tax arrangements. Or they could be the iconic builders with white vans who run their own businesses and offset the cost of tools and materials.

Or they could be lowly paid workers (median earnings for the self-employed are around £13,000) struggling to get by. They may do casual work for different employers or work constantly for the same one, denied the employment rights they should be getting while their employers evade national insurance costs.

This is the issue at the heart of the growing number of tribunal cases against ‘gig economy’ firms like Uber, Hermes and Deliveroo. Victory may bring ‘worker’ status and entitlement to limited benefits like the minimum wage but it still means existing halfway between the full rights of employees and the tax advantages of self-employment.

But this is not a new debate. Before the second world war dockers queued at the port gates waiting to be chosen for a day’s labour. They too were ‘workers’ denied the rights they eventually won through trade unions.

Or think about building workers. Away from the largest sites and the most skilled trades, the trend has always been towards casualised forms of employment despite the best efforts of the trade unions. This is compounded by the way that employers organise the work in cascades of subcontracting that pass risk down the line.

Self-employment has been rife in the industry for decades: from The Lump to labour-only subcontracting to payroll and umbrella companies, employers have used a series of devices to shift the bulk of their workforce into self-employment and minimise their tax and NI bills.

My first project as a freelance was a report on contract labour for the International Labour Organisation in 1994. I concluded that the construction industry was avoiding hundreds of millions of pounds a year in employer’s NI.

There have been periodic crackdowns including one in the late 1990s that resulted in 200,000 workers being reclassified as employees. However, the incentives for avoidance are so strong that the problem never goes away. A report by the construction union UCATT in 2014 estimated that false self-employment was costing the exchequer £1.9 billion a year and that number has probably risen since then.

Back with the economy as a whole, increases in self-employment have accounted for almost half of the UK’s ‘jobs miracle’ since 2008, much of it in low paid work. Add agency workers and people on zero hours and minimum hours contracts and you have several million workers in jobs with low pay and few if any employment rights. Among the lowest paid self-employed, there is anecdotal evidence of people being encouraged by welfare to work contractors to set up their own businesses to get them off the unemployment register.

Take this all together, and you’ll see that the row about NICs is just part of a much bigger problem about the tax base and employment rights. The Taylor Review on modern employment practices will have its work cut out and it will need more than the review of parental rights for the self-employed promised by Hammond.

Even for the self-employed themselves, the Budget row could be a sideshow. For those in the middle (like me) new digital tax account rules that in effect require four tax returns a year rather than one will be a time-consuming annoyance that could also cost more in extra accountancy fees than the NI increase.

And the lowest paid could be set to lose far more from their in-work benefits. Until now, self-employment has offered a way to get working tax credits and avoid various benefit caps without getting hounded under conditionality rules. Under Universal Credit, a ‘minimum income floor’ assumes that they are earning the equivalent of 35 hours a week on the minimum wage regardless of what they are actually earning, reducing their entitlement to benefits.

As Frances O’Grady of the TUC points out, the Office for Budget Responsibility forecasts that this change will save the Treasury – and cost the claimant – £400 million in 2018/19, rising to £1.5 billion by 2021/22. That’s more than the amounts raised in extra NI. Further cuts to Universal Credit will make the position of self-employed families even worse.

The Low Income Tax Reform Group explains more about the issues with self-employment and Universal Credit in its submission to the Work and Pensions Committee.  And, as Paul Lewis points out, the lowest paid – those earning less than £6,000 a year – may be exempt from the NICs rise but will have to pay extra voluntary contributions if they want that enhanced pension. [Thanks to @RentRebel for these two links]

As the NICs row rumbles on, defused for the moment by a delay until the Autumn, the bigger issues will not go away.