Empowering the Freelance Economy

Sunak sets sights on self-employed and CGT tax hikes

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The UK’s Chancellor of the Exchequer, Rishi Sunak, has expressed that the self-employed should be expected to pay higher taxes.

In an effort to ‘equalise’ tax contributions and taxpayer support between the salaried, self-employed and business owners either through tax hikes and/or tax mechanisms, such as IR35, the Chancellor’s stance is arguably and inadvertently already instigating the death knell for the country’s freelancers alongside a spree of solvent businesses closing up shop. The Freelance Informer reports.

The 2021 March Budget could potentially include measures that instigate higher income taxes for the self-employed and business owners, alongside other taxes, such as capital gains tax. By proactively planting the seed, Sunak could get Conservative MPs and voters onboard far in advance of the next election or any vote of no confidence in an effort to bump up the country’s threadbare coffers.

Freelancers, especially solopreneurs, could be the biggest losers in any tax grab, especially if they fall or are pushed into ‘inside’ IR35 territory or are among the millions of self-employed that have not been eligible for government support throughout the pandemic, more popularly known as the #ExcludedUK.

Unusual behaviour

The official public record register, The Gazette, has been reporting unusual behaviour of solvent companies in recent months and weeks.

The Gazette reported that 3,126 businesses voluntarily appointed liquidators during the third quarter of 2020. This was the highest reported for any third quarter since 2000. The figure had jumped 52 per cent on the same period in 2019, when 2,058 businesses voluntarily appointed liquidators.

The figures paint a very different picture to ten years ago at the height of the mortgage and financial crisis, when new companies and the number of freelancers branching out were on the rise, especially in the tech, creative and financial sectors. It is because of those freelancers-turned-startup founders that our economies and workforces were able to pivot online so quickly in 2020. They were instrumental in scaling up technology across sectors as diverse as finance, banking, retail, construction, health and energy.

According to a report by the Financial Times, “advisers attributed the surge in recent closures of solvent companies to potential increases in capital gains tax (CGT), concerns about upcoming changes to the off-payroll working (IR35) rules and ongoing economic uncertainty.”

Many highly skilled people in 2020 across many sectors were forced into early retirement due to IR35 uncertainty as clients have not been forthcoming with their stance on hiring off-payroll freelancers come April 2021.

What was left unsaid back in March

When millions of the UK’s self-employed listened with hope to the Chancellor’s 26th of March televised speech, they all believed they would be included in the Self-Employed Income Support Scheme.

But after the fanfare of the speech that included the words, “To you, I say this: You have not been forgotten. We will not let you behind. We are all in this together,” there were two messages, one said, and the other not.

When the Chancellor said that the words in that momentous speech back in March 2020, “the government will pay self-employed people, who have been adversely affected by the Coronavirus, a taxable grant worth 80% of their average monthly profits over the last three years, up to £2,500 a month,” he failed to express that would not include all the country’s self-employed, including those that had been impacted by the pandemic yet happened to have restarted their business in the past year or placed their business in a limited liability structure.

The devil in the detail came out later. What was not said, which was that some two million directors of small companies would fail to qualify because of their accounting structure — typically a small PAYE salary, and a variable dividend depending on their annual profits.

Many in 2020 would have had to go through their savings and opted to take more salary than dividends to pay the bills and mortgage as work dried up. Many would have had to use savings set aside to pay tax bills, too, as a means of survival. All because they did not receive government support despite their years of tax contributions, for a variety of reasons, such as setting up a newly registered business, built-up savings earmarked for a pension, recent widows that had received a life insurance payout, or income that had exceeded £50,000, to name but a few examples.

What was said – future taxes

But Rishi Sunak did provide a glimpse of what was to come in that very same speech: higher taxes for the self-employed.

“I must be honest and point out that in devising this scheme – in response to many calls for support – it is now much harder to justify the inconsistent contributions between people of different employment statuses. If we all want to benefit equally from state support, we must all pay in equally in future,” said Mr Sunak.

Should there be any signs of a vote of no confidence as the Prime Minister faces the ongoing trifecta of challenges involving the COVID vaccine roll-out; mounting company insolvencies and layoffs; and Brexit-related business costs, the Chancellor’s managing of taxpayer expectations sooner rather than later would allow him to set the tone for any objectives he may wish to action down the line.

Therefore, do not be surprised if tax hikes aimed at certain segments of the self-employed are announced in March, but potentially postponed for a later date. IR35, however, is set to start in April, so taxes for those affected will already be set in motion. IR35 is already wreaking havoc and uncertainty for freelancers, contractors, agency care workers, private locums and others, but also those medium-to-large companies that want to hire freelancers for their flexibility and experience.

Freelancers to become biggest losers in tax grab

The Chancellor has without a doubt been fast-tracked to his position (from the role of parliamentary private secretary within the Business department in June 2017 until January 2018, to becoming a junior minister, then entering the cabinet just 18 months later).

No stranger to big business and wealth, given his time as a hedge fund manager and his marital ties to the Murthy family of Infosys fame, it is unclear how he may alter if at all, his previous sentiment towards big business tax cuts.

In a February 2020 article in the FT, Rebecca Long Bailey, the then shadow business secretary, said Mr Sunak had backed tax cuts for big business and the wealthiest and opposed trade union regulations.

“The mask is slipping already, this isn’t a different kind of Tory government,” she said, according to the report. 

Sunak, the son of a GP doctor and mother, who according to news reports, ran a family pharmacy in Southampton with her doctor-husband as a company director, before selling it in 2015 to Bassett Pharmacy, one would presume Mr Sunak (Jr.) would be proactive in putting tax incentives in place to encourage rather than discourage self-employment at a time of mass unemployment.

What does seem clear is the Conservative government’s stance on medium-to-large businesses that use freelancers as fair game for tax hikes through IR35. With the HMRC’s CEST tool offering little confidence in accurately assessing a freelancer’s true IR35 status with any one client, freelancers could become the biggest losers of income, because they will likely be forced to go into what is often an expensive umbrella company scheme – paying the privilege of being self-employed in the realm of £100 or more each month to satisfy the government’s IR35 scheme.

Most self-employed people do not have just one client, so they will still need to pay for the advice of an accountant to ensure they are not paying more tax than they should on any one project or freelance contract.

Then there are the other costs. Not all self-employed insurance providers have adequate or limited liability cover for certain industries, such as journalism, so if a freelancer has a mix of inside and outside IR35 work, then there are yet again more expenses to pay.

The umbrella company ’employee’ benefits will likely be in stark contrast to the more attractive benefits of the client’s own salaried employees. Therefore, the self-employed are not getting like for like.

Some companies that were highly reliant on freelancers in the past, such as banks, have already stopped using freelancers to avoid IR35 tax enquiries. Others gave ultimatums that they had to become permanent staff and abide by staff working hours or not at all. This blind approach has impacted many self-employed parents of school children that chose the flexibility of freelance and remote work to raise a family and equally gain diversified experience through multiple clients and projects. Until schools work in tandem with real-life office hours there will always be parental career sacrifices to be paid.

More taxes on home equity and pension pots?

Any broad-brush tax grab on capital or equity sitting in family homes and pension pots, especially for those that are self-employed and have in general less money invested into private pension funds, would hit many people in a bad way, possibly scrapping their retirement plans.

Essentially, a 5 per cent tax, for example, on net assets above £500,000, raising more than £260bn for the UK exchequer, would hit 16 per cent of adults, according to an Opinion (Lex) piece published in The Financial Times. Arguably, this would impact people that had finally paid off their 30-year mortgage, to then only be penalised for through more tax, and in return funding someone else’s state pension pot that may have decades left before they retire.

But there could be another tax policy scheme in the mix. The ONS’ main data on wealth has missed almost £800 billion of assets held by the wealthiest 1 per cent of households in the UK and correcting for this oversight means UK wealth inequality is higher than previously thought, according to new Resolution Foundation research. To learn more about the findings go to our news report here.

Building blocks for freelancers and SMEs

What the UK needs now is a simplified tax system that also incentivises people to not only start but build their own businesses year on year.

For every successful freelancer, there is one less person, one less family, standing in the bread line.


Surely, those self-employed or company directors whose businesses have suffered as a result of the pandemic, yet were denied government support, would consider any tax hike on them in the near future as futile.

Nonetheless, any and all self-employed should anticipate some form of increased tax for the self-employed. Any tax incentives or cuts for the UK’s self-employed will be a pipe dream in 2021. But stranger things have happened. Rishi Sunak may look back to his more humble, Hindu, and entrepreneurial upbringing (he has a private education to thank for that) and realise that if any Chancellor should be the champion of freelancers, limited company owners and the self-employed it should be him.

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