The government’s planned changes to taxation of the self-employed announced in yesterday's Budget could present significant challenges to the gig economy, according to industry experts.
Chancellor Philip Hammond announced that the tax advantages enjoyed by the UK’s millions of self-employed will be reduced following a series of changes. Class 4 National Insurance Contributions (NICs) for the self-employed will increase by 1% to 10% for profits between £8,060 and £43,000 per year in April 2018, and by a further 1% to 11% in 2019.
"People should have choice about how they work, but this should not be driven by differences in tax treatment," Hammond said, adding: "Such dramatically different treatment undermines fairness."
Hammond explained that while the tax bill for a self-employed person earning £32,000 a year would come to £2,300, an employee earning the same salary faces a National Insurance bill of £6,170, along with those taxes paid by their employer. He said that different tax treatments will cost the public purse £5 million this year.
Hammond justified the increase by saying the difference in work-related benefits between the employed and the self-employed is not as great as it used to be. He referenced Matthew Taylor's forthcoming review into modern working practices, to be published over the summer.
The changes will affect freelancers, gig economy workers, and those that work through their own companies. Charles Urquhart, employment partner at Clyde & Co, described the current climate as a “step change” in government attitudes towards the gig economy.
"The chancellor has delivered yet another blow to the gig economy after signalling that he wants to even up the tax burden between employees and self-employed contractors," he said.
"Several recent tribunal rulings have shown that gig economy workers should not be classed as self-employed contractors but there are still plenty of grey areas. There's a clear mismatch between the employment and tax positions and the law needs to be made clearer so that gig economy businesses and their employees know where they stand."
Alice Weightman, founder and CEO of The Work Crowd, expressed concern these measures bar certain groups of people from work. “Research has shown that eight out of 10 economically inactive people – such as carers, retirees, stay-at-home parents and those with health or mobility issues – would re-enter the workforce if they could do so flexibly,” she said.
“The rise in NICs will make freelancing a more difficult option for these people, potentially pushing them out of work. After all, the self-employed are already missing out on maternity pay, employee benefits and the job security that permanent employees enjoy."
She added: There’s also the danger that it could drive the freelance economy out of the UK altogether, making it too expensive to make a living here.”
Stephen Ratcliffe, an employment and benefits partner at Baker McKenzie, questioned whether the changes signal “further attacks” to come on the gig economy.
“The government has been clear for some time that it thinks too many individuals are engaging in inappropriate self-employment or quasi-employment arrangements as a means of avoiding tax and NICs,” he said.
“However, the chancellor's statement that these changes are in part driven by initial conclusions of the Taylor review on modern employment practices is interesting. Is this a precursor to further attacks on the so-called 'gig' economy when the conclusions of that review are published later this year?”
However, Bill Dodwell, head of tax policy at Deloitte, said that this was simply the government keeping tax in line with modern ways of working. “The way in which people work is changing, in some cases facilitated by technology, and the key question being asked is essentially whether the tax system is keeping up,” he said.
“The consultation on employment status is expected to be published Autumn 2017 and could be an opportunity for a radical change in the way we tax different types of labour in the UK. It will be important to ensure that flexibility of working practices continues to be encouraged, which has played a part in the UK achieving its highest ever employment.”
Acting chief economist of the CIPD Ian Brinkley suggested tax is likely to become even more complex as ways of working diversify.
“The changes to National Insurance highlight the challenges associated with having a population that is working in increasingly diverse ways,” he said. “With more people likely to become self-employed or involved in other forms of atypical employment in the future, the tax issues highlighted by the chancellor will only become more problematic.”