How to encourage self-employment

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BY MADSEN PIRIE

Self-employment is an important part of economic growth. People who start up new ventures usually begin as self-employed, perhaps with a friend or colleague. As they build up the business, it might succeed to the degree where it employs other people, adding to the total of jobs created.

One of the problems faced is that HMRC does not like it. They have shown over the years a determination to classify as many as they can into the ‘employed’ category, rather than allow them to register as self-employed. Their reasoning is straightforward. It is easier for them if employers collect and send off income tax and National Insurance on behalf of their workers. A self-employed person has to liaise with the authorities on a one-to-one basis, with HMRC dealing with them individually. Furthermore, self-employment is more complicated in that it lacks most employment rights and pays lower National Insurance. And the self-employed person can offset the expenses of employment against the income attained by it.

People who prefer to be self-employed sub-contractors often fall foul of the IR35 rules if they do too much work with one client, because HMRC wants, if it can, to count them as fully employed rather than self-employed. Basically, if a client tells them how to do a task, what task to do, when to do it and where, then HMRC will classify them as an employee of that client and collect PAYE and NI from them. The contractor will in the process lose all the freedom and flexibility that goes with self-employment/

Trade Unions do not like self-employment either, because self-employed people tend not to join unions or pay dues to them. They try to get self-employed drivers with firms such as Uber classified as employees, so they will not be able to compete with unionized employed drivers. The fact that an Uber driver can choose when and where to work, and whether to do other work as well, makes them self-employed, just as it does for Deliveroo riders.

The sharing economy and the widespread use of sub-contracting help create extra jobs and boost economic growth, but the Treasury has fought a rearguard action to postpone the way the economy is going in order to suit their own convenience.

Society is not run for the convenience of civil servants, however, and steps should be taken to facilitate more self-employment, not to constrain it. The Chancellor has said he will instruct HMRC not to pursue IR35 “too aggressively.” He should tell them to overhaul it completely so that anyone who wishes to register as self-employed can do so. People will prosper if he does.

Dr Madsen Pirie is President of the Adam Smith Institute