This week the RSA and Crunch launch a new report that calls for a step change in the way government policy treats the self-employed. We urge policymakers to replace their laissez faire approach with a model that is more interventionist – one that addresses not just issues of taxation and regulation but also pensions, welfare, worker rights and late payments, among other matters.
Corporation tax cuts. Deregulation drives. Access to finance schemes. These are the type of reforms that spring to mind when we think of ways the government can support businesses.
But are they enough?
Our new report, The Entrepreneurial Audit, argues that paring back corporation tax and culling regulation are at best insufficient policy moves, and at worst damaging to the long-term interests of the business community.
If the government is serious about improving the productivity, resilience and long-term financial success of the self-employed, then it must be more willing to intervene to set problems right – and to do so with a broader package of reforms that go beyond the piecemeal and predictable.
The report outlines 20 specific recommendations to get the government started. They include reforming National Insurance contributions, ironing out the problems of Universal Credit, repairing a broken business rates system, and creating new rights for home-based workers.
This is not a call for special favours. Nor is it a plea for expensive, blockbuster initiatives. Rather, it is a request for more subtle interventions that are grounded in evidence, and which respond to the changing realities of a modern economy.
Read The Entrepreneurial Audit report online (via Medium)
The measures we outline may not be universally popular. Some like our proposal on National Insurance may even feel like a step back for businesses. But each recommendation is presented with the long term interests of the self-employed in mind, particularly those who live in the most precarious circumstances.
Our ultimate goal is to ensure that more people, regardless of their background, have the opportunity to enjoy the benefits of meaningful self-employment, which at its best can offer economic security married with flexibility and a deep sense of purpose.
Here is a taster of the ideas set out in the report:
Equalise the treatment of workers under National Insurance – The self-employed should pay the equivalent or a similar National Insurance rate to employees. The current discrepancy (where the self-employed pay 9% of earnings above the threshold vs. 12% for conventional employees) creates clear incentives for bogus self-employment, which in turn deprives workers of rights. It also makes it all but impossible to call for extra welfare coverage such as access to Statutory Maternity Pay. To those who argue that a levelling of NICs would punish a group already struggling with low pay, remember that it is the highest earners who are the real winners from the discrepancy.
Reform Business Rates so that tax is paid on revenue or at the point of sale – Business Rates is an antiquated tax in urgent need of reform. Being based on the value of property, it fails to adequately capture the huge value generated by internet sales, and is irresponsive to economic cycles. It would be better to tax businesses based on the amount of revenue they generate, or at the point of sale / delivery. This would have the advantage of netting all types of retailers, and would mean that levies more accurately reflect what businesses can afford to pay. It would also be less open to interpretation and therefore appeals – a problem that is crippling the business rates system.
Lessen the fixation on Corporation Tax and focus on more burdensome levies – The last Chancellor reduced the main rate of Corporation Tax from 28 percent to 20 percent, and the rate is due to fall further to 17 percent by the end of the decade. Yet this has benefited larger companies more than start-ups, which are usually loss-making in the first few years. According to a recent tax jury organised by PwC, the majority of businesses themselves say further cuts are unnecessary. The government should cancel the proposed reduction of Corporation Tax to 17 percent and instead use the funds to pare back more burdensome levies such as VAT or business rates.
Reform Universal Credit so it acts both as a safety net and a springboard for businesses – The introduction of Universal Credit will spell major changes to the way the self-employed access welfare. Most significantly, they will have their UC entitlement pegged to a Minimum Income Floor (MIF), with anyone earning below this amount (typically the National Living Wage) not having the difference made up in extra support. Combined with the new monthly reporting requirement, the MIF could leave the self-employed with volatile incomes considerably worse off. Among other fixes, we recommend the government extends the ‘start up period’ (where claimants are exempt from the MIF) from one to two years.
Boost pension enrolment through an opt-in / opt-out nudging scheme – Few of the self-employed are currently saving into a private pension, and those who are tend to save little and to save late. Just 8 percent of 25-34 year olds are enrolled onto a pension scheme, compared with 59 percent of employees. Following in the footsteps of the employee auto enrolment programme, which has boosted the number of pension savers by 4.4 million, the government should create a form of assisted enrolment for the self-employed, using nudging techniques underpinned by behavioural science. In practice this could mean presenting the self-employed with an opt in / opt out question at the point they complete their tax returns.
Establish a What Works Hub for business support evaluation – The government invests millions in business support initiatives, from advice and mentoring through to coaching and voucher schemes. However, many of these are insufficiently evaluated, meaning the government risks repeating mistakes and channelling money where it is least effective. The planned evaluation of the new Local Growth Hubs scores just 1 out of 5 on BEIS’s own impact evaluation score. The government should establish a permanent What Works Hub for Business Support, which would help to coordinate new evaluations in the public, private and third sectors, and disseminate the findings throughout the expansive business support network.
Ease rules and harmonise taxes that constrain home-based workers – Our report makes the case for a more careful consideration of regulation, noting that some forms of rules and requirements benefit businesses in the long run. However, when it comes to home-based working, there are some regulations that are difficult to justify. For example, tenancy agreements often stipulate that no work is allowed to take place in a property, ignoring the fact that much modern work is clean, safe and quiet. Most contracts contain clauses prohibiting tenants from causing a nuisance to their neighbours, and this should suffice as a way of preventing disturbing work from taking place. The government should consider whether a Right to Home Working needs to be established.
Strengthen protection against late payments, including through a Right to a Written Contract – Late payments continue to be a problem for the self-employed. The FSB estimates that 30 percent of its members’ bills are paid late, with 9 in 10 of these payments delayed by over a month. Promisingly, the government will shortly launch a new ‘duty to report’ rule for large firms, which will require them to share information on their payment practices and how they treat suppliers. The government should consult on whether this rule should be extended to medium sized firms. It should also consider whether the self-employed should have a right to a written contract, which spells out deliverables and a timetable for payment. Last year, the Freelance Isn’t Free Act in New York City made such contracts mandatory for any engagement above a given sum.
Watch the report launch event live [6.30pm GMT, 9th February]
Find out more about our recommendations:
Read The Entrepreneurial Audit online (via Medium)
Download the report (PDF version)
Follow Ben on Twitter @BenedictDel
We are grateful to Crunch for generously sponsoring this research.
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Hi Chris
Thanks for your comments.
If I could address each in turn:
Sole trader / partnership / limited company structures – True, the distinctions are not unpacked up front, and in the tax section we focus on the circumstances of sole traders. However, we do make reference to the potential knock-on effects that an alteration in NICs could have on incentives for incorporation. Further RSA work may explore the tax status of these different business forms, although you may have seen that the IFS recently produced a detailed study on this very subject.
IR35 – This is certainly on our radar, and we have discussed it elsewhere (e.g. here https://www.thersa.org/discover/publications-and-articles/rsa-blogs/2016/09/5-tax-reforms-to-create-a-more-entrepreneurial-society). We chose not to cover IR35 in this report as we had yet to come to a firm position on how it should evolve, if at all. As I’m sure you know, the government plans to shift the onus of proving the independence of a contractor from the individual worker to the engager / employer. We have heard contrasting views on whether this is a positive or negative move,and will come back to the matter of IR35 in future work.
The gig economy / bogus self-employment – We recognise the problem of bogus self-employment, including that which is not related to the use of ‘on demand’ platforms. Indeed, one of the reasons we suggest the levelling of NIC rates between employees and the self-employed is to combat dubious self-employment (see pages 15-16) My colleague will shortly publish a study on the gig economy, which will go into more detail on methods for supporting workers that sit within ‘grey zones’ of employment.
Late payments – I agree. Being able to charge your clients a percentage fee is not a panacea to solve the stubborn problem of late payments. That is why we also propose other measures such as extending the new ‘duty to disclose’ on payment information – which requires large businesses to state how and when they pay their clients – to medium-sized businesses also.
Fair / unfair contracts – Again, I agree. But the fairness of a contract is partly subjective and in the eyes of the engagers, with each contract to be judged on a case by case basis. So I’m unsure whether there is an obvious policy solution here. Your supermarket-farmer example speaks to a broader issue of market power, and whether there is a role for the government to address the presence of oligopolies in markets.
Recent graduates – I graduated in 2008, nine years ago.
Happy to talk more about the above, in person or over the phone.
Ben
As someone who co-founded one of the first enterprise agencies, more years ago than I care to remember, and who continues to be involved in programmes to support and promote entrepreneurship, I looked forward to reading this report. I have to confess that I was immensely disappointed.
Let me pick up on just a few of the points. Principle 1 is demanding the same 'protection' as employees. If this translates into the ability to claim SSP etc, then I have no problem, but there is a dnager here that one argues for 'protections' that mean there is little choose between self-employed and employed. The whole point of being self-employed is to be in control of your destiny. I would agree that people need to be helped to think through the implications, but then it is up to them to make provision.
Rec'd 1: I understand the desire to sting the self-employed with more NI - but governments generally do not act out of 'fairness', but in an effort to promote behaviour that would not otherwise happen. So a lower rate of NI is intended to encourage people to become self-employed. The logical next step of the argument is to sting the poor self-employed entrepreneur for the employer's contribution as well. It would actually be much better to scrap NI completely and reform income tax. At the same time, the government could reform the problem of marginal tax rates exceeding 60% for those people who end up earning more than 100k but less than 150k.
Rec'd 3: I am not clear why a levy based on land values would be any different to a levy based on property values. A levy based on turnover, whilst attractive, is just another form of sales tax. And has exactly the same problems of which local authority takes the money. One option would be central government to collect all taxes, in a more progressive way, and fund local authorities directly. But that would be unpopular and remove any sort of local authority independence in a country that is already too centralised. So we are probably stuck with rates as being the least bad way of raising revenue.
Rec'd 13: Recreate the SBS. The SBS came about precisely because the then Chancellor, Gordon Brown, wanted to emulate the SBA (and what is now the SBA Office of Advocacy). It was given responsibility for all the UK government's support for small business and the CEO was expected to be 'the strong voice for small business in the heart of government'. Inter alia, the CEO sat on the Ministerial Panel for Regulatory Accountability and attended meetings of regulatory reform Ministers convened by the then Prime Minister, Tony Blair. The problem is not that the SBS had objectives that were too broad - it did not and they were clear, along with its vision to make the UK the best place in the world to start and grow a business - or that it had limited powers, though in fact it had no power other than persuasion. The real problem was that Ministers did not like being taken to task by what they perceived to be a government agency staffed by civil servants. Unless that culture is changed, then another SBA or SBS will be no more successful than the last one.
Sadly there is almost no reflection on the biggest problem - regulation. The UK is still quite good, at least according to its ranking in the World Bank's Doing Business league table. But it could do so much better. No mention, for example, of HMRC's move to force the self-employed do quarterly tax returns, which will simply add to the administrative burden and leave teh entrepreneur with less time to be entrepreneurial.
I see no mention of the great fraud, which HMRC consistently ignores -- I wonder why -- of bogus and forced self-employment.
Get deliveries to your home or office? They are often made by drivers forced to work as "self-employed", or leave. No sick or holiday pay, forced to work bank holidays, provide own van, arrange cover for absences, oh, and below minimum wage. Great for Hermes etc. Complain and be told to "fuck off if you don't like it, we'll get someone else".
No mention of sole-trader/partnership/limited company structure (the FSB started as a union of sole-traders opposed to government tax incentives to make them become limited companies).
No mention of personal services companies and IR35.
Gig economy is a footnote, though Uber and Deliveroo get mentioned as if forcing self employment on workers was something invented by phone apps - it has been going on for years.
Late payment completely misunderstood - you can make the interest rate 1,000 % but if claiming it will lose you your job, the rate is unimportant. The biggest part of claiming late payment is the fee, not mentioned in the report at all. And no mention that 30-days is archaic, a hangover from the days of posting invoices, recording in ink in double-entry bookkeeping ledgers and paying by cheque. No need in a modern society for more than 7 days standard credit terms or cash on delivery.
No mention of fair/unfair contracts - the law thinks two businesses entering a contract are equal negotiators. They are not. Having a written contract is meaningless if the terms are unfair. Tesco giving a farmer a contract does not make it a fair contract.
Seriously the report is an embarrassment. Get someone who has actually been self-employed, not two recent graduates in their first job to write the next one.
Totally agree with everything you say. There is a total lack of reference to the upcoming issues facing those working under the 1r35 which are likely to victimize legitimate self-employed people. While I accept the report is well meaning, it smacks of trying to over-regulate when start-ups need a culture of encouragement, not more bureaucracy. it's important that there is a clear distinction between the fake self-employment ploys of some companies and those seeking to get their own enterprise off the ground. As above, I think this report needs a rewrite.
No mention of sole-trader/partnership/limited company structure (the FSB started as a union of sole-traders opposed to government tax incentives to make them become limited companies).
No mention of personal services companies and IR35.
Gig economy is a footnote, though Uber and Deliveroo get mentioned as if forcing self employment on workers was something invented by phone apps - it has been going on for years.
Late payment completely misunderstood - you can make the interest rate 1,000 % but if claiming it will lose you your job, the rate is unimportant. The biggest part of claiming late payment is the fee, not mentioned in the report at all. And no mention that 30-days is archaic, a hangover from the days of posting invoices, recording in ink in double-entry bookkeeping ledgers and paying by cheque. No need in a modern society for more than 7 days standard credit terms or cash on delivery.
No mention of fair/unfair contracts - the law thinks two businesses entering a contract are equal negotiators. They are not. Having a written contract is meaningless if the terms are unfair. Tesco giving a farmer a contract does not make it a fair contract.
Seriously the report is an embarrassment. Get someone who has actually been self-employed, not two recent graduates in their first job to write the next one.