Pre-Budget hints that Chancellor Philip Hammond is eyeing tax and VAT raids on freelancers and microbusiness in the impending Budget would lead to “an epic disaster for the tech sector and economy if they are implemented” warns Lee Murphy, the CEO and founder of Pandle, the cloud accountancy software for small businesses.

Lee Murphy, an accountant and tech entrepreneur, said: “The British economy over the past 20 years has been a huge success story, creating millions of extra numbers of jobs and sustaining growth in the face of a pretty difficult global economic background. 

“The massive growth in people freelancing, particularly professionally and technically skilled mature workers and working mothers, is at the heart of this phenomenon.  It is no coincidence that London and the SouthEast has been the UK’s economic powerhouse and has, disproportionately, far more freelancers than elsewhere.

“Short term tax and VAT raids on Britain’s 2 million freelancers and 3.3million other microbusinesses[i] will hurt the economy badly by damaging this most dynamic sector, while costing employer’s dearly in additional costs and skill shortages.  It is particularly bad news for the many businesses, such as mine that use freelance programmers for tech projects.”

Mooted tax raid on freelancers

Earlier in the year the government compelled all public sector bodies to stop using freelancers unless they are provided by umbrella companies or operate a company inside HMRC’s “IR35” regime, which aims to ensure people are genuine freelancers and not “disguised employees” being paid this way to avoid National Insurance payments. 

It has been a disaster for many public sector organisations, with large numbers of skilled tech freelancers transferring to the private sector while many others have become full time employees (increasing the long term costs for the tax payer).  Treasury leaks suggest it could now nonetheless be applied to the private sector (see here for more details).

Lee Murphy of Pandle said: “Our calculations on the following page show that tech freelancers and the self-employed do not receive substantial tax benefits, particularly when you consider they will not be benefiting from employment rights such as sick pay, holiday pay, redundancy pay nor an employer’s pension contributions.

“For instance, a freelancer earning £120,000 per annum and operating through their own limited company will take home £78K per year, while an equivalently paid employee takes home £73K.  “ {NB the engager does make a saving through paying less employer’s National Insurance compared to having an equivalent employee}.

“The taxman is paranoid that lots of freelancers are really “disguised employees” who work full time for one employer on an indefinite basis.  There is a bit of that, but tackling it by hitting 2 million innocent people with massive cost and bureaucracy, not to mention additional costs being passed onto the organisations that use them, will damage this essential part of Britain’s economic success.”

Mooted reduction in the VAT limit to bring more microbusinesses into its web

The Office for Tax Simplification last week published recommendations including the lowering of the VAT threshold from its currently level of £85,000 to potentially as low as £26,000, dragging in most microbusinesses and freelancers currently outside the regime (see this for more details).

Lee Murphy said: “VAT can be hugely complex and needs simplifying.  However, this complexity is caused by the byzantine web created by the numerous and continuous rules and rulings, and nothing to do with the threshold.  

“The thought of dealing with it will send shudders through many microbusinesses, who often deliberately keep their turnover down to stay under the threshold and avoid its cost and administrative burden.  It is a case of “cart before the horse” and the reduction of the threshold should absolutely NOT happen until the VAT regime is sufficiently straightforward that microbusinesses can apply it without concerns they are inadvertently breaching some obscure rule.”