The government’s war on the self-employed will backfire

The government’s war on the self-employed will backfire

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VAT has already been pushed about as high as it can go. Corporation tax is coming down to help keep the UK economy competitive after we leave the EU. Raising income tax is political suicide, at least for the Conservative Party. With a persistent budget deficit, even at what is almost certainly the peak of the economic cycle, and with public services clamouring for more money, there are not many groups left for the treasury to target.

Except, of course, the self-employed. We have already seen an assault on dividend taxes to make it harder to work through your own company. An attempt has also been made to raise self-employed workers’ national insurance contributions.

Now we are seeing an attack on what counts as self-employment or not, with a draconian tightening of the IR35 rules in the public sector, and a consultation on rolling that out to private companies as well. Many people who thought they were working for themselves and were responsible for paying their own taxes will suddenly find that is no longer true.

There is a problem, however, and it is far from a minor one. It is going to backfire, and potentially very badly. Sure, the revenue will collect a bit more in tax money. But it will demoralise and demotivate hundreds of thousands of workers, fuel emigration, and worsen productivity. Overall, both the government and society more widely will end up worse off.

The self-employed have always delivered a bit less revenue for the government than salaried workers. They pay a lower rate of national insurance. And because they pay through self-assessment, the money flows to the treasury far later than it does for anyone on PAYE.

But that was always seen as a fair compensation for all the things they have given up, such as pension schemes, paid holidays, paternity leave and so on. Anyone who thinks the self-employed are on Easy Street clearly doesn’t know someone who works for themselves.

Over the last five years, the government has been steadily whittling away the tax advantages of self-employment. Right now, its main focus is on the rules on whether someone is actually an employee or not.

Of the 4.8 million people who work for themselves in Britain, a vast percentage are on contracts, going into a workplace for set days, but taking charge of the own tax affairs. There has always been a grey space on whether someone is actually an employee or not. But a tightening of the rules for the public sector has reclassified tens of thousands of people as employees.

That is not proving at all popular. Take the NHS for example, which uses vast numbers of self-employed care workers. A survey by the Independent Health Professionals’ Association found that 98 per cent of its members were unhappy with the reforms.

A further 70 per cent said they would think about shifting to private healthcare providers, while a third said they might look for work in another European country where the rules were more flexible. It is likely that the mood is similar in local government, education, social care and all the other government services.

Why would anyone expect anything else? After all, the IR35 reforms mean vast numbers of workers in the public sector have just been given a significant pay cut. They were never likely to be happy about that, especially as many of them are not terribly well paid in the first place and have had their pay virtually frozen for the last eight years as the government struggles to get the deficit under control.

The extra tax they are now being made to pay will really hurt. Even worse, many of them, especially in healthcare, come from the EU. They very easily can up sticks and move somewhere that appreciates them a bit more.

Here’s the problem. Like so many tax rises, the treasury focuses on the cash it can raise but pays very little attention to the knock-on impact of its taxes. In the NHS, the reforms have already demoralised an over-stretched, pressurised workforce, and will lead to worse services, and higher staff turnover.

Since that service alone accounts for nine per cent of GDP, it is hard to see that as a great trade-off for society – we get a little more tax, but worse healthcare. The same will be true in other public services. 

If the government rolls those reforms into the private sector it will be even worse, demoralising millions of workers in IT, construction and logistics, and in other sectors where contract working is common. We will end up with lower productivity, as workers lose motivation, and probably a lower employment rate as well, as some, especially the over-65s, decide it is not worth the hassle of working any more.

It is self-defeating. The government should recognise that self-employment is one of the most vibrant sectors of the economy, creating jobs and wealth, fuelling entrepreneurship, and supporting critical public services. If we don’t collect every last penny possible in tax from them, it hardly matters – continually attacking them ends up doing more harm than good.

By Matthew Lynn, financial correspondent