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'Who pays for these spiralling budgets?' – IR35 issues to hit public spending & taxpayers

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Self-employed workers were hit particularly hard by the pandemic and recent data from the Office for National Statistics (ONS) showed there has been a drop in the number of working freelancers within the economy. The percentage of self-employed workers is now sitting at below pre-pandemic levels.

IR35 hits the economy

Analysis of the data showed key industries are at a specific risk by the lack of self-employed talent. Vacancies in the transport and storage sector are up sharply at just over 40 percent and the number of self-employed individuals working in transport and storage is now just 266,000.

Cristian Ley, employment law expert at Guild Freelancing, explained these trends are a direct consequence of changes to IR35 tax laws which were introduced earlier this year in April. He said they have forced a “considerable chunk of people out of self-employment” – further exacerbating the already-crippling shortage in these key sectors.

Additionally, Mr Ley warned the changes to IR35 tax laws have also effectively barred self-employed individuals from working on rail and engineering projects, consequently driving up budgets on key infrastructure projects.

Mr Ley said: “One of the key pillars of the Government’s strategy to build back better is the array of infrastructure projects – such as Hinkley Point nuclear power station, HS2, and Crossrail.

“However, all these projects are far exceeding their original projected costs – with Hinkley Point expected to cost at least £23billion and HS2 at least £98billion. One of the main factors in these bloated budgets is the cost of people. Building projects require thousands and thousands of workers.”

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“But this country has created an operating environment which makes it almost impossible for firms to make use of self-employed tradespeople and professionals. They are obliged instead to use a PAYE workforce with all of the additional costs that entails.”

Mr Ley examined the role IR35 has had in this. In April 2021, the Government extended IR35 tax rules to the private sector which forced businesses to manage the tax status of contractors they hired. In response to the “convoluted compliance measures” which emerged as a result of this, many firms steered freelancers towards versions of PAYE instead of working for themselves.

The ONS figures, released in mid-November, showed there are now 4,268,000 self-employed people in the UK, which is down from a high of 5,025,000 in the last quarter of 2019. Mr Ley argued with fewer “cost-effective” freelancers on public projects, the wage bills would soar and so will the cost to the taxpayer.

He continued: “Who pays for these spiralling budgets? Ultimately, we do, via our taxes. No surprise then that the UK public is experiencing the highest tax burden since the end of WWII.

“The Government must act to reverse the bias against self-employment and create a more welcoming environment for freelancers. HMRC should issue IR35 guidance for businesses that shows compliance is achievable and workable.

“Self-employment, when done correctly and with strict compliance, can be a force for good. It can speed up engineering projects and help keep costs down to the benefit of everyone.”

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Public debt and spending

Rishi Sunak and the wider Government have wrestled with spending levels over the last 18 months or so as the state stepped in to keep the economy afloat. Recent figures on public debt levels have painted a mixed picture on how the Government is keeping on top of its obligations.

In late October, additional data from the Office for Budget Responsibility (OBR) showed the UK’s GDP was just 0.8 percent below the level it was at in February 2020, right before the pandemic hit Britain. The Government’s budget deficit – the gap between spending and income – was also shown to have improved from a record £355billion in the year to the end of March 2021, when it stood at the highest level ever recorded in peacetime.

Figures from the ONS showed borrowing fell to £21.8billion in September 2021, down from £28.8billion in the same month a year earlier.

However, more recent data showed the cost of servicing UK Government debt more than tripled in October from a year earlier due to surging inflation, leaving the budget deficit higher than many experts forecast.

Interest costs sat at £5.6billion in October, compared with £1.8billion during the same period last year.

Mr Sunak addressed rising public costs in his recent Budget and the Chancellor assured his aim was to lower taxes once the UK fully recovers from the pandemic. The Chancellor was questioned by the Commons Treasury Committee following the Budget and he said voluntarily raising taxes was “the last thing” he would want to do.

Defending his choices, Mr Sunak urged MPs to consider the outcome of the spending, as opposed to the costs involved.

He said: “We can look at the taxes and, yes, people are paying more, they’re going to pay the new health and social care levy, no-one is pretending otherwise, that takes money from people, that’s why in an ideal world I would prefer not to have to put taxes up on people.

“But you do get something for that money. It’s all very well to just look at the taxes without looking at what you’re getting. So, you can talk about living standards by just looking at the tax side, I think that’s probably slightly unfair because people’s quality of life is also influenced by the quality of the public services that they get.”

Mr Sunak also pledged to bring taxes down again when he could: “That’s very much my goal, my mission, over the remainder of this parliament, and we took a step in that direction at Budget.”

“Self-employed tax reform signals £1.7billion tax grab”

Despite Mr Sunak’s declarations, analysis of what was unveiled in the Budget showed the self-employed may be hit even harder over the coming months. According to insight from the Chartered Institute of Taxation (CIOT), reforms to tax calculations for the self-employed will result in a significant acceleration of tax payments by businesses affected by the change.

A policy paper published in late October confirmed the Government’s plans to reform the “basis period” rules which determine how trading income for unincorporated businesses (that is, self-employed sole traders and partnerships) is allocated to tax years. The proposal is to change the allocation so it will be based on the profits or losses arising in the actual tax year, rather than (as now) in accordance with the accounting period ending in the tax year.

Pete Miller, Chair of the CIOT’s Owner Managed Business Committee, commented: “This change will mean that affected businesses will pay tax on profits for more than a 12-month period in the tax year 2023 to 2024 as they transition into the new ‘tax year basis’. Whilst it will be possible to spread any excess profits over five tax years, the Exchequer Impact of the change is significant.

“Between 2024-25 and 2026-27 it is expected to raise an extra £1.715billion. There will be further impacts over the following two years so the overall impact could be over £2billion. This is a significant acceleration in the amount of tax revenues flowing into the Exchequer.”



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