Fixing the UK’s leaking financial tap

By Dave Chaplin, CEO of ContractorCalculator

As any plumber will tell you there’s more than one way to fix a leak – you can patch it up for short term effect or do a proper job and fix it once and for all.  The latter is the preferable and for the Government the UK’s financial plumbing system is one that needs sound fresh thinking rather than a patched-up approach.  Currently the Government has access to a number of tax taps from which it siphons off cash in the form of income tax, VAT, corporation tax and the like – there are also National Insurance Contributions which, although technically not a tax, the cash from NICs is redistributed by government, sometimes quite randomly to other parts of the system.

With the increased number of freelancers and contractors, an estimated 1.4 million make up the UK workforce today, the influx from the NICs tap is waning.  Flexible workers pay fewer NICs because of the way they work and clients no longer have to pay employer’s NICs when they take on a freelancer or contractor.

However, the Government needs to find a source for more tax and with this objective in mind it adjusts the flow of other taps in the system at will – we have seen IR35 and new ones such as the controlling persons legislation and off-payroll rules are just two more taps waiting to be switched on but they are a drain on the economy and inefficient to boot – the cost of servicing these taps might outweigh the trickle of money that drips out of them.

We don’t need more taps but we do need a fresh approach – in tax circles discussions are around merging NICs and income tax, increasing compliance to catch out those who abuse the system and taxing flexible workers as though they are employees.

However, such mergers might mean that workers would shudder at what would be a perceived hike in tax.

IR35 already exists to catch those who abuse the system and the off-payroll rules and controlling persons legislation are more examples of quick fix patches to mend a leaky pipe.  IR35 does not work and most flexible workers pay less NICs as a result of using perfectly legitimate trading models like limited companies.  No amount of ‘disguised employee’ legislation can address what is a major workforce trend.

Limited company contractor witch-hunts by politicians and the media saw a direct comparison between the circumstances of employees and flexible workers – they are not comparable; employees get paid holidays, sick pay and a raft of other benefits, contractors and freelancers do not.  And, they not only receive none of these benefits, freelancers also have to make provision for holiday, sickness and pensions, and all the costs of running a business, out of their fees.  What’s more they don’t enjoy employment rights and run the constant risk of not getting paid – neither do they have the relative security a full time position as an employee brings.

Taxing flexible workers and the employed the same would be a massive disincentive to a resource that is adding value to UK plc; 1.5 million freelancers are contributing more than £100 billion to the UK economy.  We want to encourage this flexible resource to grow and thrive, not punish them so that it has the opposite effect of driving them out of contracting and even out of the UK altogether.

About the author:

Dave Chaplin is the founder and CEO of ContractorCalculator.co.uk, www.contractorcalculator.co.uk, an online resource for freelancers and contractors that has become the expert guide to contracting.  Dave has recently published the second edition of The Contractors’ Handbook which provides all the advice freelancers and contractors need whether they are new to contracting or experienced old-hands.