Australian Economy

Albo to repeat UK attack on self-employed

As Prime Minister Anthony Albanese winged his way back to Australia after the Queen’s funeral, he would have been wise to look back over his shoulder at announcements being made in the House of Commons by the new UK Truss government.

While Albanese was in flight, the UK Chancellor (Treasurer) was repealing UK tax administration laws that had been smashing UK self-employed people since 2017. What drove the repeal was a realisation that the UK laws were doing major harm to the UK’s economy. More importantly, the issue was cancerous for the Conservative Party’s political future.

The overarching political issue is that politicians might think that they can quietly mug the self-employed without too much ‘pushback’. But eventually a reaction swells that can’t be ignored. At the moment, the critical UK issue is tax administration. In Australia it will soon be the ‘gig’ regulation issue.

The Truss government might be in trouble over broader economic issues but on the topic of self-employment they are dismantling a major institutional impediment damaging the UK economy.

The UK issue goes back to 2000. Self-employed people in the UK are taxed differently from employees. Depending on how the calculations are done, self-employed people either appear to be paying less tax or are double-taxed.

The UK tax authority, His Majesty’s Revenue and Customs (HMRC), views all self-employed people as tax dodgers. In 2000, laws were introduced (called ‘IR35’) that enabled HMRC to declare self-employed people to be employees. The trouble is that, invariably, when the courts looked at HMRC’s opinions, HMRC lost. Despite their dismal performance, in the process, the tax authority destroyed the small business person’s business. HMRC have left a bloody trail of bankrupted self-employed people, and even suicides, where they have been proven to be wrong.

However, after the Global Financial Crisis of 2008, UK self-employed numbers grew from around 12 per cent of the workforce to about 15 per cent. Economists at the time reported that the UK’s post-GFC economic growth came substantially from the rise in self-employment. The HMRC viewed this growth as a threat to the revenue.

In 2017 HMRC shifted tactics. Instead of directly attacking self-employed people, additional new rules, called Off Payroll, required the engaging business to be responsible for deciding if a person was self-employed or an employee. But the engaging business had to use HMRC’s online decision tool (CEST) to make the assessment.

At first, the rules applied only to the public service. Naturally, no public servant is going to make an assessment that differs from what the HMRC says. HMRC collected more tax, but this was just a circling of money: Government departments giving money to another government department (HMRC)! Dumb!

In 2021, HMRC applied the new Off Payroll rules to the private sector. This is where disaster struck (again). Third-party operators had evolved since 2017 and claimed that they could manage the Off Payroll rules. The public sector, followed by the private sector, forced self-employed contractors to work through these third-party operators. But far too many of these operators ran their own tax-dodging schemes, stole from contractors, and operated outside the UK to avoid UK laws.

What a mess – and it was all the result of the UK tax authority (HMRC) making a botch of tax administration, with the UK government going along with it.

In August 2022, the London School of Economics reported that UK self-employed numbers were down by 500,000, and dropping. It said, ‘The economy is not going to recover until we start treating them (self-employed people) better.’

This message about economic reality was delivered shortly after Boris Johnson had resigned as Prime Minister, but it was already resonating throughout the UK. Rishi Sunak was Johnson’s Chancellor. He introduced Off Payroll to the private sector in 2021. When Sunak made his pitch to become Conservative Party leader he was hammered on social media for his trashing of the self-employed. Liz Truss promised to do something about IR35. Truss won the leadership.

What has caught everyone by surprise is that the new Chancellor’s announcement last week is a complete destruction of Off Payroll. This is a massive embarrassment for HMRC but shows the extent to which the Truss government is seeking a total reset. The new Chancellor, Kwasi Kwarteng, said the government would ‘turn a vicious cycle of stagnation into a virtuous cycle of growth’. Dumping Off Payroll is a headline part of a substantial package of business encouragement reforms aimed primarily at easing regulatory complexity.

The current UK ant-Truss headlines are focused on macroeconomic issues. But when micro-issues are looked at, such as this tax administration reform, there’s substance to the Truss approach. Time will tell.

What has all this to do with Australian Prime Minister Anthony Albanese? Business regulation complexity and bureaucratic stupidity grind down economic growth. Ultimately there are political consequences.

Albanese is committed to grinding down self-employed people. His Minister, Tony Burke, makes ‘cancer’ references about how self-employed people work and is promising major new regulation. The political pitch is under the banner of ‘protecting’ workers in the gig economy. But this is really the same sort of spin that the UK tax authority ran in ‘protecting’ the revenue. Pitch it anyway you like, but it still amounts to an attack upon self-employed people – in Australia that’s more than 2 million people.

The Albanese/Burke-promised gig crackdown will inevitably require legislative structures which trash self-employed rights to be self-employed. It will be an attack against fundamental economic and human rights, principles, and practices. As always, the people who will most ‘get it in the neck’ are the politically least powerful – in this case ordinary Australians who want to do self-employed gig-type work.

Ken Phillips is Executive Director of Self Employed Australia

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