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Report on review of self-employment policies and an examination of freelancer taxation

A strategic review of the legislative framework relating to contractors and freelancers is needed to ensure the government meets its long-term aim of simplifying the tax regime.

The Association for Independent Professionals and the Self Employed (IPSE) has applauded recommendations for a review of self-employment policies and an examination of freelancer taxation made by entrepreneur Julie Deane’s recently published independent report of the self-employed population.

camCommissioned by Prime Minister David Cameron, the review of the UK’s self-employed workers outlined a number of recommendations for the Government to consider in order to ensure the growing freelance workforce reaches its potential. These recommendations included the review of self-employed policies and a review of the current tax system used by freelance workers.

Crawford Temple, chief executive of trade body PRISM, has said that an extensive review of the entire freelance system is a “win-win situation” that can provide contractors with a vision for the future and is the only way the government can succeed in standing the “test of time”.

According to PRISM, a review could result in a number of changes in legislation including a tax system that is easier to understand, tax-based recognition of different sectors within the industry, removal of market distortions, increased tax and supply chain compliance, and a clear plan for the government’s long-term commitment to freelancers.

Mr Temple has highlighted the tax system as one of the main areas of concern, suggesting it should be the first issue to be tackled if a review should take place.

“Our tax framework was created in an age when everyone was either employed or self-employed but times have changed,” he said. “Today’s flexible workers don’t fit the traditional categories of employed and self-employed and there are too many of them to brush them under the carpet.”

A ‘look-through’ tax system is seen as the best way to make tax simpler for small businesses.

That’s according to a review of small company taxation by the Office of Tax Simplification (OTS), who suggest that this could be “some way of dealing with the issues of IR35”.

A ‘look-through’ system would result in the shareholders paying income tax onto the Personal Service Company’s (PSC’s) profits directly instead of paying corporation tax, which is how the current system works.

The main fault of the recommendation, according to John Whiting, is that it would restrict the amount of funds available for investment and growth.

“[But] the concept of ignoring the company and only taxing the owners — who would be taxed anyway — sounds attractive. Could it work here? Would it simplify things in practice?”

A second recommendation from the review, which could affect contracting in the future, is the OTS idea for a Sole Enterprise Protected Assets (SEPA), which would give one-person businesses liability protection.

On recommending this, the OTS stated: “There is merit in a system that provides protection for personal assets for sole traders, limiting their personal liability while allowing them to continue to trade as a sole trader with the associated accounting and tax treatment.”

Kate Cottrell, status expert, said of the recommendations: “[What] could affect contractors is the SEPA [and the] look-through… [but] I cannot imagine that the introduction of the SEPA would, or could, result in the payment of less tax and NICs.

“So while it is unlikely that contractors’ tax liabilities will reduce, there could be the option of a new trading vehicle yet it would not [be] the same as the Freelancer Limited Company.”

Simon McVicker, IPSE director of policy and external affairs, has praised the report, arguing that a Government commitment to reduce “red tape” that is preventing the business growth for the self-employed and to simplify taxation rules is good news for the freelance population.

According to Mr McVicker, one of the most significant contributions would be a change to a single legal definition of self-employment to ensure HM Revenue & Customs (HMRC) recognises freelancers as businesses rather than tax evaders.

“Tax was outside the remit of the review, so we were glad to see that this was recognised as a big issue for small businesses in the report,” Mr McVicker said. “Hopefully the Government will now take these suggestions forward and simplify the situation for the self-employed — further enhancing their contribution to the UK economy.”

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