Several surveys and studies in 2011 highlighted the fact that contractors and freelancers who wish to grow their business are put off by the excessive red tape and financial burden that comes with taking on employees
Now a prominent Libertarian think-tank called the Adam Smith Institute has published the first part of a paper called “The Growth Agenda“. In it, Dr Madsen Pirie makes the case for moving to a self-employment model for the employees of small businesses. This would mean all employees would be contractors, responsible for their own tax affairs and National Insurance Contributions. As this is exactly the situation HMRC is trying to avoid with IR35, we’re going to assume the proposal will be given short shrift at the top levels of Government (if it even reaches those lofty heights), but it raises some interesting questions nonetheless.
In the report, Dr Pirie says:
“The single most effective measure which government couldenact to boost a pro-growth agenda from the private sector would be to allow all small and medium enterprises to treat their workers as self-employed people under contract.
“This changes the relationship between the two, because the self-employed person then becomes responsible for paying their own taxes and National Insurance. They would still be liable for taxes and insurance, but under the new rule the employer would pass on their contact details to HMRC, who would then contact the workers directly with their tax and insurance bills.
“The immediate effect would be to free up the employer from the burden of calculating and collecting PAYE and National Insurance. His or her workers would be paid the wage agreed for their services, but it would be payment to a contactor. The workers themselves would be told by HMRC what their obligations were, and how and when to discharge them.”
We imagine HMRC would disagree with the proposal primarily on the grounds of a massively increased workload – there are currently around 4.5 million limited companies in the UK and 29.1 million people in employment. SMEs account for 59% of private-sector employment, or 17.2 million workers. If all of these workers were to suddenly form their own limited company to work as de facto contractors, the number of limited companies in the UK would jump overnight by almost 400% – resulting in an operational meltdown at both HMRC and Companies House.
