Britain stops working for itself

Chancellor urged to overhaul tax rules after slump in self-employed workers, reports Charlotte Gifford

The Conservatives used to be seen as the party of the self-employed. But today the number of people working for themselves is at its lowest level in 10 years, according to startling figures from the Office for National Statistics.

More than 700,000 freelancers have now fallen out of the workforce since the end of 2019, and the Chancellor is under pressure to act ahead of this month’s Autumn Statement.

Seb Maley, of contractor firm Qdos, said the past three years had been “a perfect storm” for freelancers.

He said: “The pandemic, gaping holes in the Government’s Covid support and raft of tax hikes certainly haven’t helped the millions of people working for themselves.”

Many freelancers have struggled to maintain their self- employment status because of reforms to the controversial off- payroll working rules ( IR35), introduced in 2017 and 2021, which have piled stress and bureaucracy on to the countries’ entrepreneurs and cost them £1.5bn a year in tax. Politicians have called on the Government to address the glaring issues with the reforms.

Former prime minister Liz Truss said in her speech at the independent Institute for Government think tank in September that “reforming IR35 would cut red tape for small businesses”.

Repealing the reforms was one of her proposals in last year’s mini-Budget, but Chancellor Jeremy Hunt abandoned the plans. Others have called on the Government to scrap the rules outright.

David Davis, Tory MP for Haltemprice and Howden, said: “IR35 regulations cause distress, and indeed injustice, completely out of proportion to the revenue raised.

“This is a tax the removal of which would cause a small loss of revenue for the state but a marked improvement in some sectors of the economy, and would enable small businesses to operate with more confidence.

TAX BLITZ ON CONTRACTORS Self-employment can be a huge boost to the economy, with the work and pensions committee noting in a 2017 report that it allows workers “to use entrepreneurial skills to grow businesses that add value to society”.

But after two decades of steady growth, the self- employment sector was hit hard by Covid as many small businesses struggled to stay afloat.

Official figures show the sector has still yet to recover. The number of self-employed in this country picked up slightly at the start of this year, rising to almost 4.4m, only to drop back down again to 4.3m in the second quarter.

Andrew Chamberlain, of the Association of Independent Professionals and the Self-Employed, said the figures were shocking. He said: “We might have expected, as we go through 2023, to see self- employment bounce back. But that hasn’t happened.”

Economic uncertainty during the cost of living crisis is likely to be one reason, he said, why fewer people are going it alone and starting their own businesses.

Another could be the rise of hybrid working. The flexibility and autonomy of self-employment may have lost some of its shine now that many full- time employees can work from home. However, perhaps the biggest blow to self- employment has been inflicted by unhelpful government policies.

During the pandemic, then chancellor Rishi Sunak was criticised for failing to help freelancers during their hour of need, with the Institute for Fiscal Studies estimating at the time that his Self- Employment Income Support Scheme excluded nearly two million workers.

Then last year Mr Sunak rowed back on Ms Truss’s proposals to reform the controversial IR35 rules, originally introduced to stop “disguised employment” where workers dodge tax by being taxed as contractors despite effectively working as employees.

Telegraph Money’s Mike Warburton, former tax director at Grant Thornton, said the rules have since “become a blight on contractors and, along with inheritance tax, arguably our most hated tax”.

IR35 means that anyone working through a limited company must be assessed for tax purposes. If they are placed “within IR35”, they lose up to 30pc of their take-home pay, as they will be taxed at source like an employee. This is despite receiving none of the benefits of an employee, such as sick leave, employer pension contributions or annual leave.

They also lose the lower rates of tax that freelancers typically pay. As a result, the hundreds of thousands of individuals who switched to payroll in 2021-22 paid about £9,800 more in tax than those who remained selfemployed, according to HMRC.

It used to be the case that contractors would evaluate their own IR35 status. But reforms introduced in 2017 and 2020 shifted this burden on to the employer.

Many firms, for fear of getting the rules wrong, have since imposed a blanket ban on contractors working through a limited company or miscategorised them as “within IR35”.

Mr Maley said: “Whichever way you look at it, the introduction of IR35 reform saw thousands of genuinely self-employed freelancers and contractors left with little option but to become