You don’t need me to tell you that things are tough out there for small businesses. I know: having run several small businesses and having previously been our party’s Small Business spokesperson. The UK’s 4.5 million Small and Medium Enterprises (SMEs) make a huge contribution to our economy, but today they are caught in a perfect storm between contracting markets, a failure of banks to lend, and late payments. The result of these problems is that many viable small businesses have sadly failed.
There is however one sector of small business that is growing. Over the last three years we have seen an increase of 12 per cent in the nation’s smallest businesses. Freelance businesses may be small but they make a growing contribution to our economy, currently standing at £21 billion of value added each year.
Estimates suggest that up to 10 per cent of the EU’s workforce are now classified as independent or freelance and there has been a staggering 82 per cent increase in the number of such workers across the EU over the last ten years.
I am proud to say that while other political parties have often ignored freelancers in the past, the Liberal Democrats have not. Two years ago my then Liberal Democrat colleague, Liz Lynne MEP, established a forum at the European level for independent professionals and freelancers, and last week Liberal Democrats from across the EU went one step further by launching a dedicated manifesto full of policies aimed at boosting the EU’s 23 million SMEs.
Recently the freelance sector has come under attack in the UK; particularly those freelancers who operate in the public sector. This is largely due to the recent high profile exposure in the media of Ed Lester, the head of the Student Loans Company, who had been given special concessions to hold his role through his limited company by HMRC. Much of the media have reported this story with a deeply concerning tone, making claims of “tax dodging” and avoidance, leading to some journalists and politicians even questioning whether it is acceptable for people to operate as small or one person limited companies within the public sector.
Now I am not defending Ed Lester or the Student Loans Company in any way; it seems to me that this may actually have been a case of false self-employment and believe that wherever such cases exist they should be investigated and dealt with accordingly.
And I think it’s important that we should not let one high profile media exposé blind us to the reality. The fact is the overwhelming majority of the UK’s 1.6 million freelancers run legitimate businesses. These people make a vital contribution to our economy, provide value for money to the taxpayer, and give the necessary skills and services needed for both the public and private sectors to call upon as and when they are needed.
My colleague Danny Alexander has now launched a review into all those engaged in the public sector through limited companies. I feel the report is necessary to look at the issue of freelancing in the public sector in more detail if we are to move forward from the Ed Lester example. Hopefully it will enable the veil of suspicion to be lifted from the majority of freelancers working in the public sector who we should be proud of, and root out the minority of bad apples who should actually be on the public sector payroll as full time employees.
It’s important that as work on the Danny Alexander review continues, the focus remains on the bigger picture and not on one or two high profile examples in the press. It would be a big mistake to undermine the UK’s own flexible independent professionals when other countries are seeing a rapid growth in such workers. Of course false self-employment should be tackled and the laws already exist to do so, but the contribution the overwhelming majority of legitimate freelancers make to the flexibility of the UK labour market and the economy as a whole should not be hampered.
In these difficult economic times let us show that the Liberal Democrats in Government as well as in Europe are still very much on the side of the UK’s smallest businesses.
* Lorely Burt was the Liberal Democrat MP for Solihull until 2015 and is now a Liberal Democrat member of the House of Lords.
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5 Comments
I freelanced as IR35 status within the private sector (architecture) and was told by HMRC that if I went to the same site on a regular basis then I would be viewed in their eyes as an employee and so changed my status and did all my own tax, NI etc instead of using an “umbrella company”. I do not know what the “contractor” status of Ed Lester is but suspect some double standard at play here for him to be able to get away with claiming to be a contractor. This would also appear to be true for all the other so called contractors in the public sector doing the same job day in and day out at the same sites.
Whilst on the subject of small businesses and help (or not) from government. I have had to cancel two meetings tomorrow (my busiest day of the week) because thanks to the scare mongering of the coalition government and a lack of clarity with reference to the fuel crisis. Lytham St Annes in Lancashire has run dry and I have now finally run out of fuel….Judging by the comments I overheard in the petrol queue tonight I will not be the only SME suffering from this shambles in the next 24-48 hours.
Perhaps a long-term aim should be to reduce the anomalies and discrepancies between the taxation on employees vs the taxation on company earnings. More and more of us are going to have freelance incomes as the Internet makes it easier and easier for people to mix-and-match different ways of making money – for example working part-time in the mornings and then doing crowdsourced piecework online in the evening . HMRC should relax the rules on allowable expenses for employees to be more like the expenses that company owners are allowed, for a start. Getting rid of NI as a separate tax would also be a really helpful simplification. though that would take longer to achieve.
Lorely,
good to see our MP’s focusing on the issues confronting small business and freelancers. I would echo the comments of PhilW above. The tax structure needs rethinking..
Gordon Brown started the problem with a populus zero rate of corporation tax exemption on the first £10,000 of earnings When sole traders incorporated their business onmass the treasury seemed surprised when income tax and national insurance receipts fell and, not satisfied with the unitended consequences of earlier changes, introduced the even more flawed IR35 regulations.
Ask Danny Alexander to extend his review and put the Office of Tax Simpfication on the case. Implement Lord Mirrlees recommendations to combine Income tax and national insurance into a single tax, adjusting higher rate tax accordingly. Align corporation tax wit the new combined rate and reduce employers national insurance by an amount sufficient to offset the increased costs on companies of the CT tax increase.
On so doing, much of the the tax distortions that arise between taking money out of a company by way of dividends versus salary will be eliminated and we can junk the deeply flawed IR35 regulations once and for all.
@PhilW: I completely agree. The very notion of “false self-employment” is absurd, as is the artificial distinction between being an employee and being self-employed.
Being self-employed is quite different from being an employee. For one thing a self-employed person has many transient employers, so it makes sense for that person to be responsible for his or own tax, NI, etc, For another, a self-employed person has no guarentee of continued employment with any of those transient enployers, and often has virtually no power to ensure that invoices are paid on time or that promises of work do materialize. Being self-employed is quite different from a false claim to be self-employed when you are in fact a long-term employee.