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Think Tank: The taxman must wake up to the modern world of freelancing

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Think Tank: The taxman must wake up to the modern world of freelancing
Reform is urgently needed to take into account the way freelancers work.

The range of "working" options creates immense confusion among freelancers and small business owners as well as consternation at HMRC. Photo: Alamy

By Richard Tyler, Enterprise Editor | 5:48PM BST 24 Jul 2011

'Freelancers are tax dodgers," I found myself saying at a breakfast seminar the other day – and instantly regretted it. I had meant to say that the tax system labels people who independently trade their skills and services as "tax dodgers", which is not the same thing at all.

But the horrified expressions on the faces of my audience, some of whom were freelancing public relations specialists, suggested my outburst had served its dramatic purpose. Surprise, weary dismay and anger are the three most common reactions to the way the tax system treats the 1.4m individuals who earn their living as freelancers, contractors or sole-trading companies. It is no exaggeration to claim that the vast majority are running foul of a tax system that has not kept up with the way they work.
The taxman likes things black and white and, if given the option, would insist on white. He would like all working adults to be employees, so taxes on earnings would be collected through PAYE and employers would cough up their National Insurance contributions (NICs). But freelancing is not like that. Earnings can come from one customer or many at the same time; for short periods of time or over multi-year contracts. The taxman's distrust of sole traders and the self-employed is deep-rooted and not without some foundation. As Dave Hartnett, HMRC's most senior tax collector, argues, small businesses make up a "sizeable element" of the uncollected tax each year. In the past decade, I have watched HMRC step up its activities. One common trick is to target the small businesses that are on its radar, using them as a way to identify contractors and staff who may not be paying the right amount of tax. I remember receiving calls from irate funeral directors in 2004 who were being hit by fines for allowing pall- bearers, gravediggers and church organists to take their payments as selfemployed people. HMRC decided they were employees, as many tended to only work for one funeral director. As such, the employer and employee were, at a minimum, avoiding National Insurance contributions and probably also some income tax. Since then I have seen HMRC go after construction workers, doctors and dentists, eBay traders and even parish council clerks. At the heart of this issue is the different tax treatment of the self-employed, partnerships and employed, and the dramatic rise of sole-trading companies. This latter group are usually skilled workers who are attracted to the limited liability status of the company structure as well as the clear tax advantages of paying a low salary and drawing income through dividends. The range of "working" options creates immense confusion among freelancers and small business owners as well as consternation at HMRC.

The official statisticians recently highlighted the scale of the confusion. Some 400,000 oneperson companies had classed themselves as self- employed while also being registered at Companies House, skewing the statistics on the total stock of businesses. The root cause of all these problems is the legal definition of employment, or more accurately the lack of one. As HMRC states on its website: "The law for Income Tax, NICs and VAT does not define employment or self-employment." Yet at the same time, HMRC demands: "For tax and NICs you are responsible for correctly determining whether your workers are employed or self-employed". It then lists 11 exceptions to that self-policing rule where it has acted to clamp down on underpayment by particular groups. What is needed is political appetite for reforms. The Conservatives made pledges in opposition to reform IR35 – one of the key pieces of anti-avoidance legislation designed to prevent freelancers from dodging NICs when working for only one customer. The Coalition began on the same foot, asking the Office of Tax Simplification (OTS) to examine the issue before realising, as the OTS rightly pointed out, that IR35 would be unnecessary if Government was brave enough to abolish the NICs system. The Chancellor, George Osborne, announced in the March Budget plans to examine the implications of merging NICs with income tax. Since then, I understand the Treasury has downgraded the plans to a review of the administration of the two taxes rather than a complete overhaul. It means the long grass is beckoning once again, which is a mistake. A survey this month of 45,000 firms by PeoplePerHour, an online marketplace, found a 68pc increase in the number of businesses using freelancers as "remote workers" – see the potential confusion again – with a quarter citing cost savings as the primary motivation. The Treasury must grasp the nettle and drive through the simplification of taxation of earnings that Britain's modern economy so desperately needs. It is the responsibility of Government to let people know where they stand rather than the other way round. If action is taken, compliance rates will improve. The taxman can then concentrate his efforts on catching real crooks.

Summary
Surprise, weary dismay and anger are the three most common reactions to the way the tax system treats the 1.4m individuals who earn their living as freelancers, contractors or sole-trading companies.

It is no exaggeration to claim that the vast majority are running foul of a tax system that has not kept up with the way they work.

Description
At the heart of this issue is the different tax treatment of the self-employed, partnerships and employed, and the dramatic rise of sole-trading companies. This latter group are usually skilled workers who are attracted to the limited liability status of the company structure as well as the clear tax advantages of paying a low salary and drawing income through dividends.

Tags: Cloud Labor, Crowdsourcing, freelancing, online workers, remote workers, self-employed, tax collection, taxes, taxman

Posted by Tim Satterthwaite

Aug 14, 2011 08:51 am GMT Viewed 1991 times

Author: Richard Tyler Source

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