Biggest threat to self-employed has been missed

An £8-a-week saving is a start but to really help, the Chancellor needs to scrap IR35

The Chancellor has followed in the footsteps of his great tax- cutting predecessor, Nigel Lawson, who set out to cancel a tax in each of his budgets, and did so.

The elimination of “class 2” National Insurance, paid by self- employed people, is therefore to be welcomed. I am old enough to remember licking a purple stamp to post in my employment card when I started work many years ago.

Nevertheless, this tax was well past its sell- by date. The cut in “class 4” National Insurance by 1 percentage point is also good news.

However – and I do not want to sound churlish – we need to keep this in perspective.

The combined impact on someone who is self- employed generating profits of £34,400 a year will bring an annual saving of about £410 a year, or just under £8 per week. At the same time the impact of inflation on frozen personal allowances will claw back about half of that saving in extra income tax. I note that Jeremy Hunt mentioned support for pubs several times. This NI saving would leave enough for perhaps two pints of beer at your local each week.

In his speech he rightly thanked the army of self- employed delivery drivers, plumbers and others who played such a major part in helping the nation through the pandemic.

What disappoints me, however, is that he failed to mention that scourge of so many self- employed workers: the intermediaries legislation, better known as IR35, the reference number on the press release used in 1999 when Gordon Brown announced the measure.

This rule and the related “off payroll” tax frequently top the list of the most disliked tax laws in the country.

When Brown introduced the legislation it seemed a reasonable response at the time to limit the growth of personal service companies specifi cally designed to reduce income tax and National Insurance for contractors. Unfortunately, he failed to take the opportunity to clarify the rules on what does and does not count as an employment. That has been left to the courts to decide, which has led to a series of confusing and contradictory judgments over the past 20 years that has frankly left a total mess.

Contractors up and down the country have been left to grapple with the rules. And they are not the only ones struggling.

Last year it was revealed that major government departments had failed to understand the rules with over £100m owed to the tax authorities. This, embarrassingly, included the Justice Department, which employs the same judges who have inadvertently helped to create the problem.

Although much derided, we should remember that Liz Truss and her shortlived chancellor at least recognised the issue and announced some initial plans to tackle it.

Since then the matter seems to have been shunted into a siding. In the meantime, thousands of contractors have ended up paying more tax and National Insurance than legally required because their customers fear the consequences of getting caught and so force them to operate under Paye.

But they don’t get any of the benefits of being employed, such as sick pay, pension contributions and so on.

I do not want to sound like a broken record but I need to repeat the case of broadcaster Kaye Adams as an illustration of how bad this problem has become. Having won her case at two previous court hearings she was told recently by the Court of Appeal that she would have to have her case referred back to the tribunal because these earlier judges did not understand the rules and were applying the wrong tests. This would be bad enough if HMRC were paying all the costs but the reverse is true. Kaye has already been left with costs many times the tax claimed by HMRC, and she has been shown to be in the right! There are thousands of contractors facing the same problems.

Small businesses are vital to the economy and deserve clarity on what the rules are and the assurance that they will be applied fairly.

Self- employed workers do not have the benefits of holiday and sickness pay, and they are entirely dependent on their own hard work and ingenuity to support themselves and their families.

I fear that the Chancellor’s warm words will ring hollow for those affected who may see his statement as a missed opportunity.

‘This NI saving would leave enough for perhaps two pints of beer at your local each week’

Mike Warburton was previously a tax director with accountants Grant Thornton. His columns should not be taken as advice or as a personal recommendation, but as a starting point for further research.

SOURCE: ONS