Why government needs to get serious about self-employment

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

#selfemployment 

We are grateful to Crunch for generously sponsoring this research.