UK Edition
Why tax rules mean the economy is suffering as 'entrepreneurs' abandon self employment
Self-employed people are closing down businesses and returning to full-time employment as the prospect of new tax rules has left the contractor market in disarray.
As of April, employers will be responsible for assessing the tax status of their contractors, in line with the “IR35” regime.
Currently the contractor does this, but the system has been changed to prevent “disguised employees” from gaming the system. This is where they leave work as an employee but return as a contractor. This means the employee earns more money by charging day rates, pays less tax as they are contracted as a company, and the employer reduces its wage bill.
A number of firms, including Britain’s biggest banks, which employ tens of thousands of freelancers on fixed-term contracts, are scared of getting it wrong.
To avoid legal disputes with the taxman, many have said they will no longer employ contractors unless they are paid as de facto employees on the company payroll via “umbrella” firms. These umbrella agents become the effective employer.
The contractors pay higher rates of tax on their incomes but do not enjoy any of the benefits of being an employee, such as sick pay or access to a company pension scheme. It means some face losing as much as a third of their earnings as the banks are refusing to pay more for their services.
Conrad Murkitt, a 53-year-old IT consultant, switched back to full-time employment after 10 years as a contractor.
“I had a choice of a large wage cut without any extra benefits or potentially ending up in a dodgy tax scheme,” he said. “I’m earning £40,000 less than I was, but at least I have that security now.”
Some say that, as a result of leaving freelancing, they will end up contributing less in taxes than before – a perverse result of legislation that was designed to iron out kinks in the system.
One freelancer, 55, who is still contracted by HSBC, said he would have no choice but to eventually make the move.
“I’ve had a meeting about taking on a permanent role. I would be lucky to get 50pc of my income based on the day rates I can earn now,” he said.
“I generate around £80,000 a year for the taxman as a freelancer in VAT, corporation tax, National Insurance and the rest. If I went back to being an employee, I’d earn a lot less. After I and the employer have paid our dues – income tax, National Insurance, the apprenticeship levy – the Treasury would end up with around £58,000.
“I’ve got until April to find a job or I’ll be taking a big pay cut and have no benefits to show for it,” he said.
Andrew Chamberlain of the Association of Independent Professionals & the Self-Employed said the rules were clearly having an impact and stifling entrepreneurship, which would hurt the economy.
HM Revenue & Customs said the reforms would not affect people who were genuinely self-employed.
harry.brennan@telegraph.co.uk