Why a cap on contracting would be self-defeating

It always cranks up before Autumn Statements, but the rumour mill’s current offering about the chancellor a week today is sensational, saying that highly paid contractors face being put on PAYE if they spend more than a month at any one workplace, writes Jason Piper, senior manager of tax and business law at the ACCA.

At a time of both tightened political purse strings and increasing global economic uncertainty, it’s important that George Osborne harvests all the tax revenues he can, almost regardless of whether or not there’s some truth in the mill.

The ‘level playing field’ argument

The UK needs to ensure that the economic model is balanced so that contributions to society are made fairly. The government has made clear that it does not have any truck for what they consider to be the unacceptable avoidance of National Insurance Contributions. If the outputs look the same, then the taxes should be the same – at least that’s the basis of the “government source” who apparently spoke to a national paper about fairness and why a ‘one month-then-payroll’ clause is apparently on the cards to reform the area that IR35 is meant to police.

And there’s something to that – why should the tax treatment of two otherwise identical transactions differ based on nothing more than the words on a document filed in an HR folder?

Well, as contractors and their supporters will rightly tell you, it’s an argument that’s wrong on so many levels – practical, economic, historical. The transactions just aren’t the same. Just ask the contractors working on HMRC’s Aspire deal who, in 2009,  had to swallow a 15% pay cut in a way that its employees would probably resign over. And more recently, ask too the contractors at Bank of America, and those at HSBC, who have had both their rates and billable time reduced, with refusal to accept almost immediately resulting in termination.

What’s wrong with the level playing field argument (continued)

The long term outcomes aren’t the same either; contractors who move every 6-15 months to roll out ever more advanced systems updates to successive clients in the London financial sector would never be able to do the same as full time PAYE employees, looking to move jobs – not least because most employment contracts contain intellectual property clauses which could open up arguments about whether the specialised skills and knowledge which form the basis of their business had become the property of their employer. The Edwardian master/servant employment model that underpins the mechanics of our employment taxes just doesn’t hold true any more. This is true for a significant proportion of the workforce.

And even if the roles of contractor and conventional PAYE employee were comparable, the tax system doesn’t treat identical outcomes the same. I’ve blogged about it in more detail here, but the tax system is just a part of wider society, and we regularly use it specifically to differentiate otherwise identical outcomes – to encourage one way of getting there, or deter the other. Furthermore, if there’s something that everyone from the Daily Mail to the FT has noticed, it’s that the world of work is changing, and with it the contributions that individuals make to society change, as does the way they make those contributions.

Writing on the Wall

There are some who, for good reasons, think that for a long time the writing has been on the wall for PSC contractors, in that either the individual needs to be an employee either of the agency or the business that they are working for, rather than going through any other vehicle (save perhaps an umbrella operating PAYE).

This school of thought says that whether or not the reported ‘one-month-then payroll’ clause is unveiled now - at this Autumn Statement, or later, contractors need to be mindful that this type of measure will be the ultimate outcome. As for end-users, this school also says that if contractors are working for them solely for any length of time, the contractors will probably have to be treated as employees. The big fly in the ointment here is that while the national press, central government departments and local government makes understanding noises about a tax system adapted to the ‘gig economy’, the one-month clause is of course diametrically opposed to that.

There is one area of tax status which does need action, and that’s the enforced false self-employment model that prevails in some sectors. Trying to disguise the true status of low paid workers through use of sham companies is an abuse that merits action. But it is a totally different situation to the supply of a single defined individual’s expert services on a bespoke basis. The legal mechanisms may look the same, but the economic conditions driving it, and the social outcomes flowing from it, are radically different.

Cooking your huskies for food

Coming forward with ever more extreme solutions to an intractable problem that has its roots in the basic provisions of UK business law doesn’t help anyone. Deliberately implementing a measure like the reported ‘one month-then-payroll’ clause that won’t, and can’t, fix the underlying issue while creating short term problems of its own, and piling up further clashes with changing work patterns in the future, just doesn’t stack up.

Like cooking your huskies for food on the first day of an arctic trek, trying to squeeze an extra £400million out of micro-business (the figure reported to be what the rumoured ‘one-month’ clause is reported to claw back) would be incredibly short-sighted. Worse still, in much the same way that once the huskies get wind of the plan they’ll be away over the horizon leaving you with no supper and no way to move forward, a lot of the activity which takes place on short term business-to-business contracts does so simply because business-to-business is the only model that works. Imposing a financial and administrative burden that makes it unattractive is likely to see the predicted tax take evaporate, along with all the other future benefits of that economic activity.

Years of ramifications if the one-month clause bites

The Treasury may not appear to have realised it, but just as saving money by cutting tax collecting capacity is a poor long-term strategy, raising funds by destroying economic activity is a self-defeating tactic. At a recent Bank of England event, Mr Osborne pointed out that to be good at FinTech you need a solid base in both financial services and technological expertise. But this is a sector that has run on the ‘gig economy’ almost since birth. London handles more capital markets activity than the whole of the rest of the European Union combined - and that’s based on a unique blend of skills, attributes and legal frameworks. London’s IT community may not have been the foundation of that structure, but they are the keystone in the crowning arches; taking that out to use as a doorstop on the stable of enforced disguised self-employment abuses in other sectors would have a long term impact that might not be felt in this chancellor’s term, but would certainly be felt by the next.