Conclusions and recommendations from freelancer report

The report of the All Party Parliamentary Group on Small Businesses on freelancers contains the following conclusions and recommendations.

Conclusions and Recommendations

Freelancers clearly play a vital role in the UK economy. They provide a flexible highly skilled resource to businesses in both the UK and overseas. However they are not being used to their full capacity by SMEs and by the public sector. In addition freelancers lack the necessary background knowledge to be confident of applying for opportunities in Europe. There needs to be:

• a greater awareness of what freelancers have to offer to SMEs and the public sector,
  
• better information on the opportunities in the public sector for freelancers
  
• better information on the regulations applying to working as a freelancer in Europe
  
• greater uniformity regarding the taxation and employment laws applicable to freelancers in the EC

However, it is clear that freelancers believe that the Government does not appreciate or understand the role they play in the UK economy or their value to the economy. This is in part due to the fact that as most freelancers are employees of their own company they do not feature in such statistics as the unemployed, unless they have closed their company. It is clear that many freelancers may spend a year or more looking for new work before closing their company and claiming benefits.

Regulations, in particular IR35 and more recently section 660A, have and are having a very adverse effect on freelancers. They have created great uncertainty, due to the inherently subjective nature of the legislation and the, at times, apparently arbitrary application of the legislation by the Inland Revenue.

This legislation is also costing businesses considerable sums in terms of added professional and compliance costs - vastly in excess of the costs identified in the IR35 Regulatory Impact Assessment.

Freelancers are also being demotivated by these regulations and, with the current slump in demand for IT freelancers in particular, many are contemplating ceasing to operate as a freelancer or seeking to take their skills permanently overseas.

There is also grave concern that the expense regime permitted by IR35 is inadequate to allow them to run their businesses effectively. In particular the inability to claim training costs is seen as being a major obstacle to their remaining up to date in their technical area and places them at a great disadvantage compared to consultants from larger companies that are not subject to IR35 and which can claim the costs of staff training.

There is also widespread concern that outsourcing and misuse of intra company transfer regulations is causing tremendous damage to the UK market for skilled freelancers, especially in IT. Freelancers are outraged that large companies can use intra company transfers to bring overseas IT workers into the UK when so many UK IT experts are currently without jobs or contracts. The longer term effects of this trend are also of grave concern as valuable experience is passing overseas or to overseas workers. And to overseas companies that will compete with the UK in future.

The spread of preferred supplier agreements is also seen as not being beneficial overall even though they may be of benefit to clients who wish to rationalise their purchasing administration. Using preferred suppliers sometimes hampers the flexibility of managers within a business to set up the most advantageous freelancer arrangements and results in added costs.

Recommendations

There are a number of recommendations that flow from the results of the on-line consultation:

• 1. Public sector bodies should be encouraged to advertise all work and tender opportunities on their web site so that freelancers are more aware of the opportunities that exist.
  
• 2. Public sector bodies should also simplify the tender processes for smaller projects - say those of less than £100K a year value. They should also simplify any pre-qualifying criteria so as not to automatically exclude the majority of freelancer businesses.
  
• 3. The Government should consider sponsoring a central database of information relating to the taxation and employment regulations around the EC and should also use that process to identify any national regulations that discriminate against freelancer services being provided by UK freelancers operating through the typical medium of a small company.
  
• 4. The Government should carry out a detailed review of IR35 to ensure that the costs in terms of the impact on the freelancer market are justified by the benefits in terms of the taxation impact. There is little real evidence that IR35 has proved cost effective in terms of dealing with tax avoidance without also impacting genuine businesses.
  
• 5. The treatment of training costs under IR35 appears to be having very adverse effects on the ability of freelancers to keep their skill set up to date. In particular it prejudices their ability to compete against larger businesses that can claim the costs of training staff.
  
• 6. The 5% expense allowance also disadvantages freelancers in periods when their income is low and they are most at need of investing in training or new equipment. It is suggested that the expense allowance includes a fixed amount that is independent of turnover.
  
• 7. IR35 is not providing any increased employment rights for workers. Clients have no incentive to either engage with freelancers on a truly self employed basis or to replace freelancers with permanent employees. Thought should be given to whether more can be done to align employment status with tax status in IR35 situations where workers are clearly disguised employees.
  
• 8. Section 660A is a major uncertainty and concern for freelancers and is having a very negative effect. In view of the great uncertainty as to whether the guidance contained in the Inland Revenue's Tax Bulletin 64 is correct, it would be very helpful if the Revenue were to agree that they will not seek to apply Section 660A to situations involving ordinary shares which have normal voting rights and rights to capital for any periods prior to the issuing of Tax Bulletin 64. It would also be helpful if they would agree to seek a judicial review of the issue of whether ordinary shares can ever be wholly or substantially a right to income. This issue underlies much of the Revenue's approach to Section 660A.
  
• 9. The Government should carry out an immediate review of whether companies are abusing the right to bring cheap workers from overseas into the country on intra company transfers. Circumstantial evidence points towards cheap overseas workers being used to replace both UK freelancers and UK permanent staff rather than to provide skills that are not available within the UK market.
  
• 10. The Government should review their procedures for issuing security clearances to make it easier for small companies to obtain clearance for their employees ahead of obtaining any contract to provide services that require such security clearance.