How the government can win back the micro-business vote 

Darren Fell assesses what the government could and should have done this summer to cater more for the needs of small businesses.

After six years of being more or less ignored by the Chancellor, we didn’t expect many announcements that would impact our clients at the recent Summer Budget. The self-employed and one-person limited companies, despite being the largest and second-largest groups of business entities respectively, enjoyed middling support from the Coalition government. A tax cut here, a business support scheme there; welcome changes, but nothing to get excited about.

The new Conservative government was elected on a ticket of low tax and small business support, so it came as an unwelcome surprise when George Osborne announced the popular Employment Allowance would be withdrawn from one-person limited companies, and the tax on dividends (which many limited company directors use to top up their salaries) would be rising sharply. The changes mean higher tax bills and fewer support schemes for one-person businesses from next April. Hardly what they signed up for.

Baker Tilly’s head of corporate tax summed up the changes nicely:

‘It is hard for that not to be seen as an attack on entrepreneurialism and enterprise for small and medium-sized businesses who likely view the tax breaks from paying dividends as a way of correcting an imbalance for taking risk in setting up their own business and employing people.’

There’s more, though. The government is planning to strengthen IR35, a troublesome piece of legislation which polices employment status and puts an undue burden on one-person companies – and review how freelancers and contractors claim expenses. All-in-all, one-person businesses took a beating at the Summer Budget.

During the election campaign David Cameron said his government would ‘give as much, if not more, attention to small and micro businesses as we give to large corporations’; little were we to know to what kind of attention he was referring!

Many freelancers and contractors, who simply wish to ply their trade free from government interference, are justifiably angry at these changes so soon after they helped elect a Conservative majority government.

If the Conservatives want to live up to their claim to be the party of small business, here are some legislative changes they can make that might get them back in micro-business’ good books.

Rethink IR35

The intermediaries legislation has been a millstone around the neck of contractors for over 15 years now, and despite going through several reforms and reinventions since it came into force remains as contentious as ever.

The realities of staying IR35-compliant not only costs contractors big time, it severely limits the agility of what should be the country’s most flexible workforce. Contract reviews, status investigations and comfort letters all mean work gets delayed, costs inflate, and the benefits of employing a contract worker are watered down by the necessity to prove to HMRC they are indeed a contractor.

The last time HMRC attempted to improve its enforcement in 2013 the results were so disastrous they abandoned them around a year later. Now they’re at it again.

IR35 doesn’t need strengthening; it needs destroying.

Treat SME legislation differently

When the Agency Workers Regulations came into force in 2010 to protect low-paid agency workers, many high earning freelancers and contractors were swept along for the ride despite not needing any protection.

When HMRC launched their Real Time Information filing system in 2013 they focused their awareness campaign on payroll companies and large corporates. Research we conducted with OnePoll a month before launch showed only one in five micro-businesses was prepared.

When new EU VAT rules came into force in January this year, legislators forgot to include exemptions for small businesses, meaning many sole traders selling apps and ebooks for a few pounds suddenly had the same reporting requirements as Google and Amazon.

These are the most extreme examples, but they illustrate a point. Those who draft legislation know nothing about the realities of running a small business, and ignore how new laws could impact them.

The US has a separate Small Business Administration to look after the interests of SMEs and a similar approach could work well in the UK.

Late payment

You would assume that if a company has business dealings with another firm they have an interest in that firm staying afloat, which is why it is so frustrating to see huge corporations like Tesco and Selfridges impose onerous payment terms on their smallest suppliers.

For every 100 businesses that fail around 25 will have gone under due to cash flow problems, and these issues can often be solved simply by using friendlier payment terms.

The late payment issue is all the more pronounced to one-person businesses. They have the least time for credit control, are often at the bottom of the supply chain, but need the cash more urgently than anyone else.

The credit control culture in the UK is fundamentally backwards; we place the onus on the payee to chase late invoices, rather than on the payer to cough up what they owe in a timely fashion.

The Coalition government’s first stab at fixing the issue, the Prompt Payment Code, fell flat when businesses signed the code and simply ignored its terms. The new government plans to set up a small business conciliation service to mediate late payment disputes, but this still places the responsibility for ensuring timely payment on the party which is owed money.

If the Conservative government can come up with a workable solution for the late payment problem not only will they lock in the small business vote for 2020, the companies saved from oblivion will continue to grow the economy and give George Osborne something to crow about at the next Budget.

Darren Fell is founder and managing director of Crunch Accounting.

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Darren Fell

Darren Fell is founder and managing director of Crunch Accounting.

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