Experts warn the Chancellor that ‘draconian’ tax changes would ‘drastically undermine’ a struggling sector
In the last chance saloon ahead of the Budget on 3rd March, professional bodies are urging Rishi Sunak to avoid drastic tax changes and instead protect freelancers and contractors, and help businesses “rescale and rehire” through a long-term strategy.
The Coronavirus pandemic pushed the overall UK deficit to £2.1 trillion at the end of December – the highest debt ratio since 1962. There is now mounting pressure on the Treasury to claw back some of the billions spent on support, and experts fear the self-employed will be a target.
Last year, HMRC delayed controversial IR35 reform in the private sector by one year due to the ongoing crisis.
IR35 reform to raise £3 billion for Treasury
But just this week the tax watchdog reiterated that the changes will come into effect on 6 April this year, publishing its set of ‘Compliance Principles’. The reform will shift the responsibility for determining a contractor’s IR35 status from the worker to the business engaging them.
IR35 changes are predicted to raise £3 billion for the Treasury by 2024. However, there is a widespread concern among independent workers given some businesses are choosing to stop engaging contractors altogether as a direct result of the reform.
Self-employment trade body, IPSE, dubbed the reform as “draconian” and warned the government of the financial disruption IR35 reform could cause to an already struggling sector.
Andy Chamberlain, Director of Policy at IPSE, said: “The government delayed the changes to IR35 that were due last April because it was clear they would add to the disruption and financial damage the pandemic was causing to the self-employed sector.”
Pandemic has left contractors in a ‘worse state’
“Today, the situation has not improved: it has worsened. Therefore, it is clear the government should again delay the changes – and preferably take them off the table altogether.”
He added that the pandemic has “financially devastated” many self-employed people and the “sector is now in a worse state than at any point in recent history” with more and more people each month losing their business.
As well as IR35, the self-employed also face another threat in the upcoming Budget that could make their situation worse, Chamberlain said, and that’s the “risk of drastic tax hikes.”
When Sunak announced the Self-Employed Income Support Scheme (SEISS) last year, he hinted at future tax rises stating “we must all pay equally in the future.”
Tax changes risk ‘damaging our recovery’
But Tej Parikh, IOD’s Chief Economist, warns that now is not the time to raise taxes.
Parikh said: “With ongoing cashflow difficulties and continued uncertainty around the pandemic, now is not the time to be lumbering businesses and the self-employed with higher taxes.
“Additional costs for enterprise at the Budget risks damaging our recovery. Instead, the Chancellor should focus on supporting business growth by providing tax reliefs to help organisations to rescale and rehire, and to lift investment in the technology that will drive innovation.”
According to reports, on Sunak’s agenda is levelling up National Insurance Contributions (NICs). Currently, employees pay 12 per cent on earnings between £9,500 and £50,000 and then two per cent above this. Whereas the self-employed pay nine per cent on profits above £9,500 in addition to two per cent on anything above £50,000.
Self-employed need ‘urgent protection’
Raising NICs, a controversial move, to be in line with employees would raise £2 billion for the Treasury, while increasing tax bills for sole traders by £500 if they earn more than £42,000, and £250 if they earn the average of £32,000.
Chamberlain said: “The government should also under no circumstances raise taxes for the self-employed in the coming year. Not only would it be deeply unjust to raise self-employed taxes to pay for support that approximately a third of freelancers could not access: it would also drastically undermine an already struggling sector.
“Right now, the self-employed do not need tax grabs and draconian rule changes: they urgently need protection, stimulus and a long-term strategy for growth.”