UK Budget – Will It Impact The Contingent Labour Market?

BREAKING NEWS (Wednesday afternoon) - National Insurance Increases Cancelled! Chancellor backs down having read Spend Matters article ...

 

The UK budget last week had some interest to procurement people, beyond the general macro-economic issues that we all watch like very intelligent and economically literate hawks  - hawks that have taken a break from pouncing on small mammals to consider the UK’s productivity and employment issues.

The Chancellor, Philip Hammond, attempted to tread a tricky path. The deficit is still huge – it was good to hear him before the event pointing out that even with interest rates as low as they are now, the total interest on the debt costs the UK more than the Defence and Overseas Aid budget together. (I think he said that anyway?) We are borrowing money now, that at some point our descendants will be paying for in some manner. Those who recommend more spending do need to remember that.

Yet there is considerable pressure to address areas such as business rates revaluation and of course the growing crisis in health and social care, which is beginning to justify that “crisis” hyperbole. So, if he was going to put some money in those directions, as he did, he needed to raise some additional tax somewhere. One of his targets was the self-employed – and those running small “personal service” type companies.

In response to a feeling that such people are getting away with paying less tax than employed folk, he has increased the National Insurance contributions for the self-employed earning over around £16K a year and reduced the tax-free allowance for dividends, which will cost the Smith household a couple of grand a year, I believe. The furore this has caused is more about what it signifies than the real effect, we suspect. The ruling Tories are supposed to be the party of low tax and support for entrepreneurs and small firms. But here they are, increasing tax and hitting those very people.

“Cognitive dissonance” has come into play, which is making Tory supporters feel uncomfortable, as my daughter, the hard-working and not very well paid self-employed science and psychology communicator (marginally worse off after the budget) might explain.

But back to procurement. Given that contingent labour (temporary staff) is now a top ten spend category for a high proportion of organisations, public and private sector, many procurement people will now be thinking about what this might mean for that market, for resource availability and costs. Another relevant factor is the new guidance for UK public sector bodies on IR 35, which is likely to make contracting to government much less attractive for many people – we will look at that in more detail soon.

As a result of the budget though, we may see more people choosing to form companies rather than going for self-employment. That opens other routes for legitimately reducing the tax burden, although it has costs too – you probably need an accountant to put together your annual filing, although you could have a go yourself if your business is straightforward. We might see small groups of self-employed joining together in a company to spread those costs, and we might also see more self-employed people simply seeking to become employed.

This is also good news for large firms who operate in markets where the self-employed have a significant competitive presence. That includes sectors such as IT software development through to blue-collar areas like plumbing and construction. Although the big firms might have more constraints when they engage contingent staff, they will also face less competition from the individual provider sector. That is not altogether good for buyers; actions that reduce competition are not generally to be applauded, so the Chancellor’s moves do come with some downsides.

We don’t see the end of the long-term trend to more self-employment though -the global factors pushing in that direction are not to be reversed by minor tax changes. And the government did not face up to the really big challenge in terms of tax revenues, which is how to capture significant income from the digital giants such as Google, Facebook and Amazon, as well as those firms like Vodafone and Starbucks that have used procurement as a legitimate route to tax avoidance through licensing, corporate centres in Luxembourg and the like.

Getting 2p in the pound more from freelancers pails into insignificance alongside those issues, which eventually someone will have to face up to – or else the current “austerity" will seem like a time of plenty for the citizens of western economies.

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