Tax and welfare overhaul required to support the self-employed, warns RSA

The government must rewrite the tax and welfare rulebook if the right type of self-employment is to prosper, according to a new report published today by the RSA.

The RSA Entrepreneurial Audit reveals that self-employment is a permanent and growing part of the UK economy - but has been failed in recent years by a shallow and narrow agenda overly focused on broad-brush deregulation and misguided Corporation Tax cuts. It found that successive governments have neglected to consider how to use other policy areas to support the self-employed, including taxation, welfare, pensions, insurance, competition policy and business support.

Today’s report, supported by online accountancy providers Crunch, fills the gap and sets out how to create self-employment that combines economic security and flexibility. Recommendations include:

• Immediately, scrap commitment to cut Corporation Tax to 17%, and cut Business Rates or VAT instead
• In the longer term, scrap Business Rates and replace them with new Revenue Rates based on firm turnover
• A new “rights and responsibilities” commitment to the self-employed, which would see some pay higher National Insurance contributions in return for greater social protections
• Deter bogus self-employment by equalising the treatment of employees and the self-employed in National Insurance contributions, potentially by converting employer NICs into a transaction tax.
• Boost pension enrolment by introducing a compulsory opt-in / opt-out question when the self-employed complete their tax return
• Create an equivalent of Statutory Sick Pay for the self-employed by introducing a collective income protection scheme to pool risk, and increase Class 4 NICs to create a Paternity Allowance
• Ensure new businesses can survive and grow by extending the Universal Credit Start Up Period, which is currently forcing many viable start ups out of business

The report’s author, RSA Associate Director Benedict Dellot, said:

“Self-employment is here to stay – which requires a much more serious and ambitious response from policymakers. This means a new ‘rights and responsibilities’ deal, which focuses on business tax cuts which actually help SMEs, whilst equalising National Insurance contributions so that the self-employed can for the first time receive proper maternity and paternity pay.

This hands-on approach will strengthen welfare coverage, boost productivity and increase the earnings potential of Britain’s entrepreneurs.”

The report also found that the number of self-employed has grown by 46% since the turn of the century and today stands at 4.8 million, or 1 in 7 of the workforce. This compares with just a 12% growth in the number of employees over the same period. Since 2008, self-employment has been responsible for nearly half (44%) of all jobs growth in the UK.[1]

Commenting on the report, Jason Kitcat, Head of Policy and Public Affairs at Crunch Accounting, said: 

“Genuine self-employment and small businesses are a vital and fast growing part of the UK economy. This report is a key contribution at a moment when there is so much debate about the nature of work and a number of government reviews underway. At Crunch, we’re passionate about empowering people to work for themselves and to experience all the positive opportunities it brings. The big, bold recommendations in this report will help move government thinking forward, so that in the near future everyone can participate in a more fair and balanced economy - whether they are self-employed or working in a larger firm.”

 

 

 

 

Download The Entrepreneurial Audit report

 

Notes to Editors

Corporation Tax

• The government should scrap commitment to cut Corporation Tax to 17%. Corporation Tax only affects incorporated businesses making a profit and the UK already has one of the lowest Corporation Tax rates in the OECD.
• Government surveys (see table below) show that just 20% of small businesses that employ staff say that Corporation Tax is an obstacle to success, compared with 56% who cite VAT and 31% who cite Business Rates.[2]

Business Rates

• Business Rates take little account of how much a business can afford to pay, since they are not based on the amount of turnover or profit a firm generates but rather the value of the property in which it resides.
• Business Rates also struggle to capture the gains from e-commerce activity. The Rates system was conceived long before the advent of the internet. We now have a perverse situation where a multinational e-commerce trader with an out of town warehouse can pay a similar amount to an independent shop on the high street.

National Insurance reform

• Employers who treat individuals as self-employed contractors when they should be engaged as standard employees face considerable savings by not paying Employer NICs. For a worker paid the median wage of £27,000, this equates to a windfall of over £2,600 every year.[3]
• The RSA Entrepreneurial Audit recommends that the government and the Office of Tax Simplification explore removing the inconsistency between how the self-employed and employees are treated under National Insurance restructure NICs. Options include:
  • The self-employed paying the same personal NICs rate as employees (12% rather than 9%)
  • Turning Employer NICs into a transaction tax paid by any household or business using the services of any worker
  • Turning Employer NICs into a payroll tax plus with employers paying a levy for all workers they employ including independent contractors
  • Merging NICs and Income Tax altogether 
• The discrepancy overwhelmingly benefits higher earning self-employed. Someone earning £15,000/year currently gains £63 in NICs savings, whereas someone earning £60,000/year gains £903 (excluding £7,160 foregone in Employer NICs).

Pensions

• Only 8% of self-employed 25-34 year olds are actively saving into a private pension, compared with 59% of employees in the same age group – a seven-fold difference.[4]
• Just 23% of all self-employed are saving into a private pension, compared with 61% of employees.[5] Those self-employed people closest to retirement (in the 55-64 age bracket) have £85,500 saved on average, compared with £162,247 for employees of the same age.[6]

Sick Pay

• Only 9% of the self-employed are signed up for an income protection product.[7]

 

The RSA Entrepreneurial Audit recommendations

 

1. Equalise the treatment of employees and the self-employed for National Insurance contributions

2.  Undertake more regular property revaluations to ensure the business rates system is fit for purpose

3.  Explore the scope for transitioning from a business rates to a revenue rates system

4 .  Consider extending the use of cash accounting to the smallest of companies

5. Lessen the fixation on Corporation Tax and concentrate future efforts on more burdensome levies

6.  Establish a Paternity Allowance and an Adoption Allowance for self-employed parents

7 .  Reform Universal Credit to ensure it responds to the realities of starting and growing a business

8.  Protect the self-employed against dips in income caused by illness and injury

9.  Boost pension enrolment among the self-employed through an opt-in / opt-out question

10. Transform the Lifetime ISA (LISA) into a suitable savings gateway for the self-employed

11. Establish a What Works Hub for Business Support Evaluation

12. Expand and raise awareness of the business coaching role of accountants

13. Consult businesses on the creation of a UK equivalent to the Small Business Administration in the US

14. Promote co-operatives as a form of mutual assistance for the self-employed

15. Ensure the Jobcentre Plus is match fit to support the self-employed post Work Programme, with a specialist in every branch

16. Reform the payment structure of the New Enterprise Allowance to avoid unnecessary drop outs

17.  Remove the ‘one in, two out’ rule for regulation and shift the emphasis to quality over volume

18. Clarify how the self-employed are treated under the Health and Safety at Work Act

19. Ease rules and harmonise taxes that constrain home-based businesses

20.  Strengthen protection against late payments, including through a Right to a Written Contract

 

The RSA

The RSA aims to enrich society through ideas and action. We believe that all human beings have creative capacities that can be mobilised to deliver a 21st century enlightenment. We work to bring about the conditions for this change, not just amongst our diverse Fellowship, but also in institutions and communities. Our work ranges from the future of our cities and communities, to education, moving towards a more creative economy and the redesign of public services.

Crunch

Crunch is the UK's first and fastest-growing online accountant, combining a team of expert in-house accountants available on-demand with simple online accounting software. It is designed specifically for freelancers, contractors, sole traders and small businesses. Crunch serves its almost 10,000 clients with accounting, insurance, mortgages and financial services. With its wider community of 24,000 firms, Crunch works to support the UK’s entrepreneurial sector through education, research and campaigning.