Micro business leaders have expressed concern about how the introduction of a “one-month rule” limit on freelance contractors would impact them, following rumours that limited company tax changes are to be unveiled in the chancellor George Osborne’s Autumn Statement on 25 November.
Some 82 per cent of micro business owners regularly spend more than a month on site with clients, according to new research by Crunch Accounting, and 79 per cent would be unable to continue working as contractors if legislation made them liable for payroll taxes as a result of this work.
The changes would compel firms employing contractors to move them onto the client payroll, and so receive earnings through pay as you earn (PAYE) after a month’s work in order to comply with a tax avoidance rule called IR35 – designed to prevent tax avoidance.
As self-employed freelancers currently pay a lower rate of National Insurance, and can benefit from lower rates of corporate tax by withdrawing earnings as a mixture of salary and dividends, harsher regulation could provide an additional £400m of tax revenue for the government, according to the Telegraph – but this would come at the expense of micro businesses.
Responding earlier in the month to reports that a change in policy was reputedly under consideration, Chris Bryce, chief executive of the Association of Independent Professionals and the Self-Employed, warned that forcing contractors onto payroll would make operating a freelance business “almost impossible in many instances”, and would cause untold damage to the flexible economy. “If the government is giving this idea any consideration, they should think again,” he added.
Julia Kermode, chief executive of the Freelancer and Contractor Services Association (FCSA), also cautioned that businesses could stop using freelancers because of the “huge administrative burden”, associated with adding the 4.6m workers who are currently self-employed in the UK to payroll.
The crackdown on how contractors are paid could be announced alongside an end to Entrepreneur’s’ Relief, and follows a consultation by HMRC over the summer on the removal of travel and subsidence tax relief for freelancers. A total of 88 per cent of the one-person businesses Crunch surveyed answered “no” to the question: “Do you feel the current government is supportive of, and understands, one-person businesses?”
Crunch micro business ambassador Jason Kitcat believes speculation about these policy changes has left micro businesses “feeling bruised” – but emphasised that the opportunity remains for government to rebuild confidence by introducing measures to support the sector on Wednesday.
Sign up to our newsletter to get the latest from Business Advice.