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This was the task 'Labour in the City' - an informal sub-group of Labour Finance and Industry Group - asked of its members and supporters. It then produced a pamphlet 'If I were Chancellor...' containing some of the short essays with a variety of priorities and themes.
One of those essays was by Philip Ross, a familiar name to Shout99 readers and freelancers. Philip, himself a former freelancer, has been a political activist within and outside the Labour Party for over a decade, primarily devoting his energies to supporting the cause of freelancers and small businesses.
Philip chose his theoretical 24 hours to create a new business model to support freelancers working through limited companies and the self-employed....here we reproduce his essay, 'Fairness for Freelancers' about what he would do 'If he were Chancellor....'
Philip Ross writes:
If I woke up as Chancellor for a day I wouldn’t waste time patching up loopholes. If I had longer I’d reform or abolish national insurance, but I have one day so I’d introduce a new tax and employment model that would reflect the realities in the new knowledge economy. A model that would allow the self-employed limited liability, the ability to grow and invest but not the ability to circumvent tax and not a model suitable for tax avoidance.
When I started writing this the front page of the Metro was all about how about how a report from the public accounts committee had highlighted the 'big four' accountancy firms' conflict of interest in advising the government on tax reform while advising their clients on tax avoidance. It would be like a locksmith fitting locks during the day and then running evening courses for burglars.
Today I learnt that HMRC have been negotiating tax settlements with other big corporations. Instead of getting what they are owed they have instead ‘settled’ for lesser amounts. At least these corporations have been paying some tax unlike the recent revelations about Google, Starbucks, Amazon and others who have almost avoided paying any UK tax.
It seems that they are content to run operations here and generate profits but not so happy to contribute to maintaining our infrastructure. It reminds me of a story my father-in-law told me. He lives in Wolverhampton while his sister lives in a well-to-do village outside the city and under a different council which pays lower council tax as they have fewer services since they can rely on their larger neighbour. So the City of Wolverhampton introduced a policy where they checked people’s addresses before letting them use facilities like the local dump much to her ire.
These examples of tax avoidance sit alongside the news that some senior public sector employees at the BBC, NHS and elsewhere have been using other mechanisms to avoid paying personal tax by ‘disguising’ themselves as being self-employed. The farce is fully exposed when you discover that while pretending to be consultants and invoicing for their fees (and thus avoiding some NI tax) they still expect their supplier to still contribute handsomely to their pension.
The big story last year of this practice was of Ed Lester the CEO of the Student Loans Company. No doubt on his business cards and on the door to his office he appeared as an employee, but for tax purposes he had a secret identity as an independent contractor. This farce is nothing new - in 1999 John Birt, then head of the BBC, engaged in a similar arrangement. The Inland Revenue’s response at the time was the ham-fisted IR35. Since then it has been vigorously misapplied against genuine freelancers in the private sector while seemingly making no difference to the tax affairs of public sector executives and celebrity presenters. The knee-jerk response from government has been to tamper with IR35, a tax which in opposition both the Lib Dems and Tories couldn’t condemn enough.
Ironically, back in 1999 the main advocates for the tax were firms like EDS and many from the big four accountancy firms who were unhappy that small firms and freelancers were undercutting their rates and wanted them taxed out of the market. In response they were exposed by the contractors’ trade association - the PCG - as also not paying their fair share of UK tax. So nothing changes - or has it?
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While celebrities and public sector executives seem to be able to circumvent the tax system while engaged with a single employer for their entire careers a freelance contract worker on a six month contract has no such luck. They are faced with tax laws which ask if they have invested in their own equipment - like a white van - or use their own tools - like spanners and hammers.
In an economy where more and more people are working as freelance and self-employed and often doing contract work in the knowledge economy we need a modern tax system that rewards risk - and working for yourself is a risk. Through IR35 it is no longer possible to pay income out as dividends, invest heavily in training or to invest profits, employee anyone else with the profits or carry profits over into a future year for investment.
Back in 1999 it was suggested that it would raise £900m per annum. Ten years later figures released showed that it directly raised less than £10m in its whole life. But instead of people working through their own companies, a whole new industry of tax avoidance has been created as individuals now work through so called ‘umbrella’ companies who pay their taxes for them and allow them - for a fee - to claim a few extra expenses.
At the heart of the problem is the issue of limited liability. Freelancers need limited liability status to win contract work which means that they can’t use the traditional Schedule D (self-employment) model. Instead they must incorporate. When doing so they can enjoy corporate tax structures (such as issuing dividends rather than using PAYE). Such structures don’t recognise whether the company is there for one person to trade alone or for 20,000. The big advantage is the avoidance of paying both employees and employers National Insurance if income is distributed as dividends rather than as salary and this can be split between family members. This all makes sense in a family firm, partly when done by a freelancer but not when done by the Chief Executive of the Student Loans Company.
The solution to this problem, therefore, if to introduce the new tax and employment model that allows for the self employed to have limited liability, the ability to grow and invest but not the ability to circumvent or avoid tax. Such reforms would send a clear message that Labour gets the 21st century and the knowledge based economy and it would be sowing the seeds for the growth and entrepreneurialism that Britain needs.
Philip Ross works for Alpheus Ltd. He is also a member of Labour Finance and Industry Group (LFIG) and is the author of ‘Freedom to Freelance - beginning the fight against IR35’.
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Susie Hughes © Shout99 2013
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