Mooted Budget tax raids to cost locum doctors dearly, as well as businesses and the economy

Pre-Budget hints that chancellor Philip Hammond is eyeing tax and VAT raids on freelancers and microbusiness in the impending Budget would lead to “an epic disaster for the economy, for the self-employed and for employers if they are implemented” warns Lee Murphy, the CEO and founder of Pandle

Lee Murphy, an accountant and founder, said: “The British economy over the past 20 years has been a huge success story, creating millions of extra numbers of jobs and sustaining growth in the face of a pretty difficult global economic background.

“The massive growth in people freelancing, particularly professionally and technically skilled mature workers and working mothers, is at the heart of this phenomenon.  It is no coincidence that London and the SouthEast has been the UK’s economic powerhouse and has, disproportionately, far more freelancers than elsewhere.

“Short term tax and VAT raids on Britain’s 2 million freelancers and 3.3million other microbusinesses [i] will hurt the economy badly by damaging this most dynamic sector, while costing employer’s dearly in additional costs and skill shortages.”

Mooted tax raid on freelancers

Earlier in the year the government compelled all public sector bodies to stop using freelancers unless they are provided by umbrella companies or operate a company inside HMRC’s “IR35” regime, which aims to ensure people are genuine freelancers and not “disguised employees” being paid this way to avoid National Insurance payments.

It has been a disaster for many public sector organisations, with large numbers of skilled freelancers transferring to the private sector while many others have become full time employees (increasing the long term costs for the tax payer).  Treasury leaks suggest it could now nonetheless be applied to the private sector (see here for more details).

Lee Murphy of Pandle said: “Our calculations on the following page show that freelancers and the self-employed do not receive substantial tax benefits, particularly when you consider they will not be benefiting from employment rights such as sick pay, holiday pay, redundancy pay nor an employer’s pension contributions.

“For instance, a freelancer paid £40,000 per annum and operating through their own limited company will take home £31.6K per year, while an equivalently paid employee takes home £30.5K.  “ {NB the engager does make a saving through paying less employer’s National Insurance compared to having an equivalent employee}.

“The taxman is paranoid that lots of freelancers are really “disguised employees” who work full time for one employer on an indefinite basis.  There is a bit of that, but tackling it by hitting 2 million innocent people with massive cost and bureaucracy, not to mention additional costs being passed onto the organisations that use them, will damage this essential part of Britain’s economic success.”

Mooted reduction in the VAT limit to bring more microbusinesses into its web

The Office for Tax Simplification last week published recommendations including the lowering of the VAT threshold from its currently level of £85,000 to potentially as low as £26,000, dragging in most microbusinesses and freelancers currently outside the regime (see this for more details).

Lee Murphy said: “VAT can be hugely complex and needs simplifying.  However, this complexity is caused by the byzantine web created by the numerous and continuous rules and rulings, and nothing to do with the threshold.

“The thought of dealing with it will send shudders through many microbusinesses, who often deliberately keep their turnover down to stay under the threshold and avoid its cost and administrative burden.  It is a case of “cart before the horse” and the reduction of the threshold should absolutely NOT happen until the VAT regime is sufficiently straightforward that microbusinesses can apply it without concerns they are inadvertently breaching some obscure rule.”

[i] Businesses with 9 or fewer employees

IR35 changes and the Budget – the options and the costs – November 2017

		Income after tax	% of total income after tax*			Total tax & NI paid
Freelance heating engineer                             £40,000 annual income before tax
Own limited company outside IR35		£31,668 per annum	79% take home***			£8,332
Own limited company inside IR35		£25,088 per annum	63% take home***			£14,912
Paid via an umbrella company		£24,523 per annum	61% take home**			£15,477
Equivalent for an employee on PAYE		£30,481 per annum	76% take home			£13,912
		Employer pays additional £4,393 Employer’s NI
Freelance marketing consultant                                   £80,000 annual income before tax
Own limited company outside IR35		£56,628 per annum	71% take home***			£23,372
Own limited company inside IR35		£49,261 per annum	62% take home***			£30,739
Paid via an umbrella company		£48,099 per annum	60% take home**			£31,901
Equivalent for an employee on PAYE		£54,180 per annum	68% take home			£25,820
		Employer pays additional £9,913 Employer’s NI
Freelance computer programmer                                £120,000 annual income before tax
Own limited company outside IR35		£78,384 per annum	65% take home***			£41,616
Own limited company inside IR35		£69,230 per annum	58% take home***			£50,770
Paid via an umbrella company		£67,486 per annum	56% take home**			£52,514
Equivalent for an employee on PAYE		£73,380 per annum	61% take home			£62,053
		Employer pays additional £15,433 Employer’s NI
Different tax structures for Britain’s 2 million[ii] freelancers & contractors – the pros & cons:
	Administration & costs			Sick pay	Holiday pay		Redundancy pay
Sole trader	Admin responsibilities handled by sole trader (also may pay for accountant)			No	No		No
Limited company outside IR35	Normal company costs and responsibilities handled by freelancer (also may pay for accountant)			No	No		No
Limited company inside IR35	As above, with additional IR35 admin responsibilities			No	No		No
Umbrella company	All admin met by Umbrella company (via fee)			Yes	Yes		Unlikely

* after paying employer’s and employee’s National Insurance and taxes on dividend income

** includes a management fee to the Umbrella Company (a separate company that provides numerous freelancers/contractors to organisations and handles the administration)

*** Does not include company filing and any accountancy costs

[ii] Source IPSE

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