Budget submission from SBPI

The Small Business Policy Institute (SBPI) has urged the Chancellor to act positively for the freelance and SME communities in the coming Budget.

In its Budget submission to Gordon Brown, the SBPI asked him to take action to address the drift of IT work overseas and address the continuing uncertainty surrounding IR35 and the right to be in business. The Group also asked him to consider modernising arrangements for maternity for the self-employed.

The SBPI is an independent think tank that seeks to drive forward policies to help small business within a framework of equal opportunities and social justice. It aims to influence policy-making in the direction of small business and freelance workers.

It was founded by Philip Ross, a leading campaigner and spokesman on behalf of freelancers, and Kevin Miller, UKTECH's IR35 expert. Philip himself has been a professional freelancer in IT before developing his career in a more political direction. He has been the only person to speak from the platform at Labour Party Conference against IR35 and, last year took to the podium again to speak in favour of freelancers. Philip contested a Parliamentary seat for Labour at the last General Election and is the founder of the ‘Labour Small Business Forum’, a network in the Labour Party comprised of self-employed individuals, freelancers and business owners. He continues to work closely with UKTECH on a number of initiatives in the interest of the freelancer community.

The co-founder of the Group, Kevin Miller recently attended the Future of Freelancers Seminar on behalf of the SBPI and is author of UKTECH's 'Freelancers Outside IR35 (FO35)' operating system.

UKTECH continues to be associated with and supportive of the work of the SBPI.

The SBPI's letter to the Chancellor sent in March relating to the Budget said:

To: Rt Hon Gordon Brown

Chancellor of the Exchequer

Dear Gordon,

The Small Business Policy Institute is an independent think tank that seeks to drive forward policies to help small business within a framework of equal opportunities and social justice. It has a particular interest in the issues affecting freelance workers in the knowledge-based economy, with one of its aims being to clearly distinguish professional freelancers from temporary workers.

We would like you to give consideration to the following issues in the coming budget :-

• Engineering and IT work relocating overseas;
  
• Right to be in business and be self-employed
  
• A better training regime for those caught by IR35
  
• Maternity pay for the self-employed
  
• Changing the pension regime to encourage greater investment in pensions.

Engineering and IT Work relocating overseas

This week there was news that BT is considering moving its Directory Enquiries team offshore to India. There is a growing trend of firms shifting projects offshore to India. This is not because Indian workers are prepared to work for lower wages but is because of special tax incentives to encourage firms to set up there.

'Profits derived from export of software (including some of IT Enabled services) are exempt from Income Tax under Section 80HHE of the Income Tax Act. (India)'

The shift of large businesses has an effect beyond that of the directly employed workers. It also affects freelancers, professionals, temporary workers and small businesses that previously supplied goods and services. While the UK IT industry has been in decline the Indian IT industry has grown by nearly 25% last year. According to e-skills UK: (e-skills UK is the industry representative body responsible for addressing the IT and Telecoms skills needs of employers in the UK)

"Meanwhile demand for permanent and contract ICT staff has continued to fall, with results from the latest Computer Weekly/SSP survey showing decreases of 20% and 25% respectively. Moreover, it is no use switching job search methods as the latest REC data shows that the agency market is still firmly in depression (and in the case of contracting, after 20 months of decline we are beginning to wonder if it will ever resurface!). In the light of this absence of demand there has been less competition in the market place and hence a further drop in advertised salaries pretty much across the board with contractors again feeling the worst of this with a 4% drop in average rates over the last quarter." e-skills.com November 2002 Bulletin

"NASSCOM, the Indian National Association of Software and Service Companies, revealed the findings of its annual industry survey on Knowledge Professionals in India to show the IT Software and Services Industry expects to employ 650,000 IT professional by March 2003. This reflects a growth of 24.4 per cent from last year's employment of 522,250 IT workers. Of the total, almost 205,000 are working in the IT software exports industry; 160,000 are employed in IT Enabled Services; 25,000 in the domestic software market and over 260,000 in user organisations." Source: UKTECH

We would urge you to consider providing tax incentives to stop firms from relocating or outsourcing their business functions or manufacturing overseas. Also in the USA Bill S1349 is currently being debated which seeks to block Government contracts from being outsourced to workers outside the US, we would urge you to consider similar legislation for the UK.

Right to be in business and be self-employed

There still remains a great deal of uncertainty among freelancers as to whether they are or are not caught by the IR35 tax. We would urge you to work with the DTI and other government bodies to provide a joined-up definition as to what is a professional freelancer as opposed to a temporary worker or ‘disguised employee’. Workers can be defined as employees for tax purposes but self-employed for employment rights. But, equally, they can be self-employed for tax purposes but defined as an employee in terms of employment rights. The latter case can be more damaging to a freelancer as it could restrict their opportunities for finding work in the first place.

We believe that the Government must clearly distinguish between the professional freelancer and temporary workers in order that these two differing groups can be dealt with separately. We therefore ask that the Government conducts a broad review of employment status and definitions, looking at the differences between employment and tax law.

We believe that a key first step is to create simple, clear criteria by which those professional freelancers, who wish to be regarded as in business on their own account, can distinguish themselves from those whose function is really that of a temporary employee. Current employment and tax case law does not provide that certainty. We suggest that consideration needs to be given to whether a simpler framework can be established which provides a clearer 'safe harbour' for those who want to have the employment and tax status of someone who is in business on their own account - whether as sole traders or as employees of their own small company.

A better training regime for those caught by IR35

We remain concerned about the impact that IR35 is having on professional freelance workers in the economy. There is a danger that, with many freelancers between contracts, that their skill sets will begin to depreciate. We would urge you to revisit the issue of claiming the costs of training and training materials (such as PC’s, books and software) for those caught by IR35.

Maternity Pay for Self-employed

We believe that more women should be encouraged to work as self-employed and go into business. However, at present they are seriously disadvantaged by the fact that they will only receive the statutory state maternity pay, whereas their peers working as employees of larger firms will receive their full wages. We would like to see the tax system reformed to allow self-employed women to off-set some of their previous earnings to be used tax free as maternity pay. I understand that this was called for by delegates at last year's Labour Conference in Blackpool.

Changing the pension regime to encourage greater investment in pensions.

The Government issued a consultative document in February 2002 called Modernising Annuities. This recognises that there are major concerns about whether the current pensions annuities legislation is meeting the needs of pensioners and those who will become pensioners in the future. However, the SBPI is concerned that the conclusions reached do little to encourage an increasingly disillusioned work force from making adequate pension provisions.

The SBPI believes that more needs to be done to encourage small business owners to invest in pensions schemes to provide for their future retirement. Although the current low rates of inflation undoubtedly help to protect the value of pensions the correspondingly low rates of interest have served to slash annuity rates. The pensions secured by pension annuities for a given capital sum have fallen by half over the past 10 years.

This fall has raised grave concerns amongst the small businessmen, whose views the SBPI represents, that the current limit of 25% on the value of their pension fund that can be withdrawn tax free as a tax free lump sum is too low and results in too much of the pension fund being locked into the annuity to provide rates of return that could be safely bettered elsewhere. We believe that this will increasingly lead the owners of small businesses to decide not to save into a pension scheme at all - which will result in greater pension problems in future.

Hence the SBPI strongly urges the Chancellor to consider allowing more flexibility with regard to tax free lump sum withdrawals from pension funds. We appreciate the concerns about pensioners depleting their pension resources to such an extent that they become a burden on the State. Nevertheless, with suitable safeguards that ensure that the balance of the fund is adequate to meet certain minimum pension requirements, we believe that allowing a larger percentage to be withdrawn as a lump sum will serve to address the concerns about low annuity rates and will bolster the Government's desire to encourage more workers to save for a pension.

We also endorse the view of the Association of British Insurers, as expressed in their paper 3 'Modernising pension annuities', which they submitted in their representations on the coming budget, that there needs to be the facility to offer a form of money back guarantee with pension annuities. We accept that this will serve to reduce the mortality cross subsidy by which pensioners who are long lived benefit at the expense of those who die prematurely. It will nevertheless help to reduce concerns about the pension fund disappearing on the premature death of the pensioner and will, as a result, help to encourage workers to make better pension provisions.

Thank you for taking the time to read our contribution. We look forward to hearing the Budget and are happy to assist in any way we can.

Yours sincerely

Philip Ross,

Kevin Miller

Small Business Policy Institute

Philip will be known to many freelancers as the driving force behind the removal of IT skills from the Fast Track Visa list last year. Philip recounts the story of how the FTV campaign developed and how in his final meeting as an adviser to the PCG, he achieved his objective and the list was wiped clean.

Kevin will be speaking at the UKTECH 'Threats and Opportunities' seminar on April 10 - the day after the Budget and will be including a synopsis of what the Budget means for freelancers.