I am aware that there are those who think that I am at my best when I stick to tax issues, which many think my core expertise. I do not agree: I think a broader view essential to an understanding of tax, which is why I have embraced and now teach other aspects of the economics discipline. As a result I am wary in suggesting to anyone that they should not comment outside their obvious comfort zone. That said, I am baffled by Jolyon Maugham's latest article on what he obviously considers to be the unacceptable tax advantages of self employment, which he would wish Labour remove.
At the core of his argument (if I read it correctly, and it is not crystal clear) are two contentions. The first is that self employed status is used by some to secure a tax advantage (Jolyon claims, without providing workings, that it is £26 per £100 of self employed net pay) that they should not enjoy. He called this the arbitrage advantage of self employment.
The second contention is that the self employed secure a current fiscal advantage at cost of a secure social safety net provided by the state by way of a reduced entitlement to benefits. Again, Jolyon thinks this wrong.
I have real problems with these contentions, and in particular the apparent suggestion Jolyon makes that the way to resolve them is to bring the self employed within the social safety net and charge them for being included. This is, in my opinion, wrong for a number of reasons.
First, I acknowledge there is a real problem with artificial self employment. The answer to this is very simple: put the onus for all penalties on the ‘employer' who would then have the liability for making payment for the missing national insurance contributions and the arbitraging possibility for unscrupulous employers seeking to evade their obligations would disappear.
Second, Jolyon wholly ignores the fact that the most egregious abuse in this area is not by the self employed as such, where my work and that of Danny Blanchflower has shown that average earnings excluding the self employed with profits of more than £100,000 a year is barely enough in the majority of cases to create any tax or NI liability at all. It is instead by those who form limited companies and pay dividends to abuse the NI system. Here the abuse is now systemic and yet attracts no attention from Jolyon. This is very hard to understand as this is where arbitraging really takes place and new dividend taxation rules will not really address it.
Third, there is an implicit assumption, as I read it, in what Jolyon wrote that there is no substantial difference between employment and self-employment. This is wrong: the differences are profound. This is why Jolyon is wrong to think that the lower taxes paid by the self employed are always a subsidy that is arbitraged: you cannot arbitrage a real difference, only an artificial one or one that you can pretend exists when it does not. Whilst there is arbitrage abuse in self employment, without a doubt, to suggest that it happens in all cases of self employment is wrong: that would be to deny the existence of a real difference that not only exists where self employment is genuine but which requires both a different taxation treatment from employment, and because of the real problem that the self employed do and will always have in proving unemployment, in the contribution made to the social safety net via national insurance as well.
In other words, Jolyon's argument is based on false premises and so comes to incorrect conclusions.
In saying this I should declare I have been self employed for 31 years. And I am also now employed. And they are quite different. Let's not pretend otherwise. Or stigmatise the genuinely self employed.
What we should do instead is target the arbitrage, and I have already noted, above, how to do that.
And nd at the same time we shoukd make sure that a viable social safety net is available to the self employed, which is the last thing that universal credit does.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
I, too, should declare an interest: I work on a consultancy contract and am self-employed. My niche is a specialist skill which large companies do not regard as a ‘core’ competence, and their staff do not see as career-enhancing, so I take lucrative advantage of a skills shortage and, from time to time, the generosity born of desperation.
I typify a niche which holds less than ten percent of the self-employed: the niche is well-defined and highly visible, and is all too often considered typical – incorrectly!
I seem to enjoy an economic security that is denied to most – permanent staff included. Further down the earnings ladder, social security is an essential safety net in a bad year; regular work is simply not available for many people with seasonal or specialist but low-paid skills, and the absence of a safety-net will erase these tail-end skills from the economy – one or two bad years and they will emigrate or be deskilled into the ‘unskilled labour’ pool of shelf-stackers – and that’ll be a permanent contraction in the economy as entire categories of skilled and semi-skilled jobs and the value they create will be permanently deleted.
Market forces will not reinstate them: the labour market, as it works today, is asymmetric with a downward ratchet against labour.
I look upon the Universal Credit scheme with horror: it is hostile to project workers who have downtime between contracts, and especially damaging to seasonal workers – musicians included – who make a significant proportion of their earnings in two or three months of the year.
It does nothing to mitigate the cashflow insecurity that bedevils the self-employed in general, and those categories in particular: on a close examination, it exacerbates the problem, despite the stated intention to do otherwise.
The cynic in me sees this as intentional: the IDS agenta has been motivated by a visceral hostility to Social Security – workers, in the ideology of Ian Duncan Smith, should live in a precarious state of insecurity, desparate for any work that puts off hunger and eviction for another day – and self-employment is important to the IDS agenda.
…Which leads me to an obvious point: what took Jolyon Maugham and his fellow-travellers so long to set-to the political and media effort to attack the self-employed?
The neoliberal agenda needs divisive propaganda and IDS is surely disappointed that the Useful Idiots, the Guardianistas, and the ‘Beige Party’ contingent of Her Majesty’s Loyal Opposition in Parliament haven’t yet joined in.
They surely will, and 2016 will see the Daily Mail join in with an overt campaign – caricatures and hate speech and a Channel Four ‘Benefit Street’ series – against the unemployed who were coerced into falsely-described ‘self-employment’ by Job Centre Plus.
I found both Jolyons’ and Richard’s posts interesting perhaps as they have a different slant (legal and economic) to the same problem of how does a state provide a social safety net in a society where all the main players in the dominant form of production (capitalism) are hell bent on avoiding paying for it.
The 1980’s and 90’s saw the march of global capitalism to arbitrage everything it possibly could in terms of labour and its regulations. Outsourcing, offshoring, insourcing, home sourcing, zero hour contracts, etc etc etc. It started with blue collar jobs, then moved to white collar jobs and now is entering the world of the lightly starched white collars where there are rich pickings from dismantling the sacred professions of many of their perks (pensions, insurances, expenses, tax perks, etc). If any state refused to play ball, then as any good capitalist knows you just pick up your bat and ball and move elsewhere (or threaten to until the state compromises)
Faced with the reality that all main players in the capitalist market no longer consider they have any obligation or remit to provide employment, benefits, pensions, health, or anything else that is absolutely unnecessary to making and increasing their profits – the state has to start to wake up to a new reality and stop harking back to past models that just will not work anymore.
Fundamental questions about why employees/self employed/small businesses are paying any tax at all should be asked. There should be a dramatic shift of the tax burden back to capital and the large corporations. This should be labour’s mandate and they should shout it loud and not be afraid of the inevitable firefight that will result. It is time for people to wake up and only clear, logical arguments will allow them to trust true left wing politicians again.
I’m soon to become self employed and wondering nervously what to expect. I’ve spoken to a lot of people about it, and everyone I know who is self employed pays themselves the minimum wage plus dividends to minimise their tax exposure. Which indeed results in a far lower tax rate for these workers than the employed. Is this the abuse of which you speak Richard in your 6th para?
I don’t know what to make of this. I’m not sure abuse is the right term for this – isn’t it just compensation for the cashflow insecurity and absence of employer benefits like tax free childcare, bikes, pensions…? I would expect it more than balances out. I suppose the problem – or relative unfairness – occurs with those self employed who are very successful and make a lot of money.
This is the ‘abuse’ and it is, of course, tax driven
It is legal though
I am suggesting Jolyon needs to think how to bring such issues into the mainstream
He is also, by the way, thinking of the genuinely self employed in his analysis – those not using limited companies
But he still misses the point there
“…everyone I know who is self employed pays themselves the minimum wage plus dividends to minimise their tax exposure”
Dear Mr Poulton – I am afraid you are being told tales by those you know. The self-employed cannot pay themselves dividends.
It is only those who run their own companies, hold shares and employ themselves who can do this. Mr Murphy, I believe you used to do this yourself. It seems mean-spirited of you to have done it yourself and now complain when others do the same thing. Even that ardent socialist Mr Ken Livingstone was doing just that until very recently.
But Mr Maugham seems to think the world begins and ends with tax. The difference between employment and self-employment is an employment law concept first, the tax consequences have been developed after this. Tax law did not invent the concepts.
“[people think] I am at my best when I stick to tax issues, which many think my core expertise”
Do not listen when people say such things! It is far from the truth!
Kind regards
Pardeep Landa
You are right
And you are also right I did do this some considerable time ago
If one does not learn and change behaviour as a consequence then you are really not growing or walking the talk and I try to do both
Richard
With respect Mr Landa, the people I talk of are close friends, family and acquaintances who do not tell tales. They are precisely what you describe – business owners. It is very easy to set up a company these days, to do freelance work and pay yourself through that company in a way that reduces your tax exposure compared to that of corporate employees.
I think it’s no coincidence that the rapid increase in numbers of self employed since 2008 has coincided with a dramatic reduction in tax revenues. But for the reasons I’ve mentioned above, I think it’s not necessarily appropriate to imply that this is immediately wrong/immoral etc since many self employed have additional costs that many employees don’t have to bear.
“…everyone I know who is self employed pays themselves the minimum wage plus dividends to minimise their tax exposure. ”
Followed by:
“…the people I talk of are close friends, family and acquaintances who do not tell tales. They are precisely what you describe — business owners.”
Your friends and relations therefore appear to be directors (i.e. employees) of (their own) companies – and certainly *not* Self Employed (what used to be called “Schedule D” by HMRC).
The general advice appears to be that this Ltd. Co. arrangement is not worthwhile unless turnover is in excess of approx £70K pa, although I’m sure our host will be glad to correct me if this is wrong.
Most self employed people earn around £10K pa.
It certainly does not pay those on £10k
Many employees have to bare similar costs to the self employed, it may come as a surprise but many employers do not reimburse business expenses!
Interesting post on FlipchartRicks blog:
https://flipchartfairytales.wordpress.com/2016/01/13/self-employment-and-public-employment-edge-closer/
I think you have misread the article Richard, when Jolyon uses the term “employer” he seems to be referring to “the client of the self-employed person” and he is saying that a company that engages self-employed consultants rather than permanent employees has an unfair £26 advantage over those companies that properly employ people (with implied employee benefits). I am assuming this is more an attempt to attack zero hour contract type employment rather than the 2 million people who are self-employed but he does not make that clear…
I am one of these self-employed NIC dodgers you talk of (I don’t make a huge amount off this but it nice to pay a little less to the government), if they want to resolve this problem they should make earnings and dividends taxable at the same rate. I don’t work this way because I want to cheat the government out of a few thousand pounds they feel they deserve, I work this way because I despise the bosses who in the past have taken 75% of what I earned in exchange for this so-called “safety net” and because by working for regularly changing clients I expand my experience and skills greatly. My increased earnings and skills is my safety net. If the current chancellor or a future Labour chancellor tries to force me into wage-slavery I would take my niche skills from the marketplace and do something where they could not force me to become an employee even if that came at a huge personal cost.
I understand exactly what you and Jolyon are saying
And I completely addressed the issue
I have also addressed the NIC issue in the past – search arctic systems on this site
This is very interesting. Are we saying then that John Smith, Director of John Smith Ltd, who pays himself 900 pounds a month plus dividends, is not self employed and is not counted as such in the self employment labour market data?
I can see why that would be so, just that I hadn’t appreciated that. It also means that all these people who do this and also pay less tax are additional to the well documented rapidly rising numbers of statistically self employed who are earning less and also paying no low/no tax due to the rising tax threshold.
They are employees