Government Changes Could Mean the end for Thousands of Businesses

Government Changes Could Mean the end for Thousands of Businesses

From:  
Lorence Nye and Jordan Marshall evaluate the latest IPSE survey results – a direct response to the Government’s proposed changes to the travel and subsistence claims process.

The end of the road? Some freelancers may no longer be able to operate

The IPSE survey shows that a concerning proportion (17.1%) of members feared they would have to stop contracting altogether if the rules were changed to mean that they could not claim travel and subsistence tax relief. This would mean a potential 45,000 people would be out of business. Only 6.5% of respondents believed that the proposed rules would not affect the way they work.

Many freelancers and self-employed people travel far and wide to access contracts. This flexibility is, in the eyes of the companies which engage with them, one of the most desirable assets a freelancer can have. Working in this way, however, does come at a cost – the average IPSE member spends in excess of £8,000 a year on expenses associated with working away from home, while according to research commissioned by Quidco the average employee spends only around £2,000 a year getting to and from their place of work.

Her Majesty’s Revenue & Customs (HMRC) estimates there are around 265,000 businesses describing themselves as ‘Private Service Companies’ that work in the same way as IPSE members tend to. These types of freelancers are incredibly productive businesses. The average IPSE member has a turnover of £107,000 per annum, and therefore we can estimate that the UK’s businesses of this type generate a total of £28.4 billion of economic output. If 17% of these businesses were to close, it would cost the UK economy around £4.5 billion a year.

 

A competitive disadvantage

There is a real fear that the changes would put freelancers at a competitive disadvantage with these businesses, given that they would be forced to incur greater costs and therefore have to put up their rates.

Members also used the survey to outline their general dissatisfaction with the Government’s approach to independent professionals since the summer Budget, with respondents pointing towards the negative impact that changes to IR35 and dividend taxation will have on the freelance market.

 

Only in my backyard: an end to flexibility

If remaining self-employed is still an option (which, as this survey has shown, for many it isn’t), the response to the survey showed a huge change to the way in which this portion of the British economy would operate. Three-quarters of IPSE members said they would not be able to continue to take contracts that are far away from their home or office. Currently, 68% of contracts that engage IPSE members are more than double the distance of the average commute for an employee. This is the marker IPSE has used to qualify what may be regarded as ‘far away from home or office’. This accounts for £14.7 billion of annual economic output, which would at least temporarily be affected while these businesses are forced to readjust; potentially, some of this would never be regained.  The freelance community is a vital and flexible part of the economy. Take this flexibility away and it will have a significant affect.

There was a strong consensus that the proposals laid out by the Government are in fact unworkable.

 

Confusion in the system

There was a strong consensus that the proposals laid out by the Government are in fact unworkable. An overwhelming 86% of respondents either agreed or strongly agreed that the definition of ‘supervision’ within the newly proposed terms would cause confusion and uncertainty in the marketplace. There were similar levels of confusion from respondents about the definitions of ‘direction’ and ‘control’.

Under the proposals, tax relief will be removed for workers who are ‘subject to (or to the right of) supervision, direction, or control of any person involved in the engagement’. Government is also proposing that the engager will be responsible for making this assessment. The definition of ‘supervision’, however, includes ‘someone overseeing a person doing work’. This is such a broad-brush definition that it is difficult to imagine clients being willing to say that they don’t have the right to ‘oversee’ the work of an independent professional.

Refusal to confirm that supervision, direction or control are absent from an engagement will, in effect, end the ability of freelancers to legitimately claim tax relief.

 

IPSE’s response

We are urging the Government to reconsider these proposals because of their potential effects on the flexible labour market, the companies which rely on the flexible supply of specialist skills, and the wider economy. The effect on overall tax revenue is also likely to be more significant than expected as many freelancers lose contracts to larger competitors who are able to claim a wide range of reliefs.

IPSE has responded to the Government’s consultation on this issue. But our campaign will not end there. Our discussions with the Government will also take into account other proposals which are set to make life more difficult for freelancers, particularly IR35. We will continue to fight these unfair proposals which are putting thousands of businesses at risk until they are reversed or a fairer settlement is agreed.

 

Article by Jordan Marshall and Lorence Nye

@LorenceIPSE