How HMRC could help creative freelancers
[Update: Wednesday 25 March 2020
There is an amendment to the Coronavirus Bill, proposed by the Lib Dems, which would create “statutory self-employment pay” at an average of the last three years’ net profit, OR £2917 per month, whichever is lower. The government didn’t adopt the amendment, but it shows the kind of thinking that’s going on. You can read the proposal on page 14 of the amendments document:
The COVID-19 pandemic has applied an unexpected stress test to parts of the way we earn and pay our taxes. And the system is showing its flaws.
It’s not surprising that the UK government first came up with a plan for supporting businesses to support their employees. Businesses hold all the information needed to push finance down the pipe into employees’ bank accounts. They also (in theory) have a moral duty to support their staff.
But the system for people who don’t fall into this earning category is more messy. Different words are used by people to describe themselves: freelancer, self-employed, sole trader, contractor, interim.
This makes it very hard to know who the government is talking about when they speak of ‘the self-employed’. For example, I run a one person, single director, limited company training business. I chose this model because it is the only way I can corral the business risk and separate it from the household finances.
I consider myself self-employed, but I suspect the government thinks I’m running a company, and not self-employed at all. To them self-employed means being registered as a ‘sole trader’, being a person and a business at the same time, which I am not.
The way people are paid and taxed also varies:
- limited company income is taxed on profit under corporation tax rules, and the remainder can be fed out to an individual via salary or dividends
- sole trader income is taxed on profit in the income tax system, with the individual keeping the rest for personal use.
This system has been broken for decades, and leads to such confusion as IR35 rules. (But let’s not go there today.)
No wonder the the government is struggling to come up with an instantly enforceable plan to support non-permanent workers. So what can be done?
Former Business Secretary Greg Clark (my local MP) has been suggesting a practical way forward. He wrote on Monday 23rd March:
Most straightforward is probably: 1. use average of previous years’ self assessments to estimate net income 2. pay 80% of that, subject to cap. 3. include these payments on post-crisis tax returns and clawback excess over any trading income actually earned during the crisis.
This would work for for sole traders, who I suspect is the group Greg Clark has in mind.
It would also work for freelancer limited companies like mine, but I’m not sure how HMRC would identify us. If people like me approach HMRC I suspect they might push us back to our bank. We’d have to negotiate a loan, which we’d have to pay back.
Not so clear is how this system would work for people who started out six months ago.
The one group that’s been forgotten in all this is the creative freelancers who are working in areas such as film, TV, broadcasting and theatre who are not full time staff, move around a lot, but who are paid through the PAYE system.
The most junior freelance roles in these industries HAVE to be paid through PAYE, and are prevented from being sole traders. But they don’t have full employment rights.
This means that there is a real danger they could fall between two stools:
- not employed enough to be supported as employees
- not self-employed enough to be supported as sole traders
CHOOSE YOUR WORDS CAREFULLY
It is essential in the coming days that government spokespeople are crystal clear which group of workers they are talking about. Instead of using a blanket term ‘self-employed’ they need to define people as:
- self-employed people registered as sole traders
- one-person limited company directors
- non-permanent freelancers paid through the PAYE system
All of which just goes to show that the earning/tax system in the UK is not fit for purpose any more.
Let’s just hope this article is rendered out of date very quickly by some clever new measures from Rishi Sunak and his colleagues.
Posted on 23 March 2020