One of the things I’m genuinely rather glad I no longer have to deal with is the sheer mental gymnastics involved in trying to work out how you are actually supposed to run a small business under the increasingly complicated tax and employment rules, because there comes a point where you stop asking yourself “what does the business need?” and start asking “what will HMRC allow me to do?” and I find that a pretty depressing place for any business owner to be.
Take something as straightforward as needing a CFO, for example. I might decide that I need somebody with a decent level of financial expertise, experience and responsibility, and that to attract somebody genuinely good I need to budget, say, £32,000 for their services. That is the amount I have available because that is what I believe the role is worth to my organisation, and I am perfectly capable of making that commercial decision myself. I then discover that if I employ that person, £60,000 is not actually £60,000 to the business because there are employer National Insurance costs and all the other associated costs of having an employee, while if what I actually need is not a full-time CFO but the expertise of a CFO for a defined amount of work, I might reasonably think that engaging an experienced professional on a consultancy basis makes far more sense.
Except then you have IR35 sitting there in the background asking whether the relationship looks sufficiently like employment for the tax rules to kick in, because apparently in the modern world it is not enough to decide what your business actually needs and agree a commercial arrangement with another professional; you also have to spend a considerable amount of time working out whether the relationship you have constructed might, in the eyes of the tax system, look like something it has decided you should have constructed differently. The government’s stated purpose of IR35 is to ensure that people who would effectively be employees if engaged directly pay broadly the same Income Tax and National Insurance as employees, which is understandable when somebody is genuinely just an employee wearing a different hat, but the problem starts when the system becomes so preoccupied with stopping disguised employment that it begins to interfere with perfectly legitimate decisions about buying professional expertise.
Because there is a fundamental difference between saying “I need to employ a CFO” and saying “I need access to CFO-level expertise”. Those are not necessarily the same thing, and yet the more complicated the rules become, the more a small business owner can find themselves wondering whether they are actually allowed to make that distinction without inadvertently stepping into a tax minefield. If I need somebody two days a week, they have their own professional business, they have other clients, they carry their own professional responsibilities and risks, they invoice me for an agreed service and I am buying their expertise rather than employing them as a member of my permanent workforce, why should the starting assumption be that I am somehow attempting to disguise employment simply because the person happens to be very good at what they do?
And this is where I think the whole thing becomes particularly frustrating for small businesses, because a large organisation can have HR departments, employment lawyers, tax specialists, procurement teams and accountants all crawling over an arrangement before anybody actually does any work, whereas a small business might simply be thinking “I need someone who understands the numbers because I don’t, and I need them to help me make sensible decisions, but I don’t need them full time.” The larger organisation can absorb the cost of compliance, professional advice and administrative time as another overhead; the small business owner is often doing all of that themselves, usually while simultaneously trying to sell the product, deliver the service, find customers, chase invoices and sort the latest chaos Windows updates have caused…
What worries me is the behavioural consequence of this sort of system, because when government makes one route sufficiently complicated, expensive or risky, businesses do not necessarily respond by obediently choosing the alternative government intended. They may simply decide not to do the thing at all. They might not hire the CFO, they might use somebody less experienced, reduce the amount of specialist help they obtain, outsource the whole function to a larger organisation, or they might postpone the decision until the business is big enough to absorb the cost and bureaucracy – essentially the 12th of Never because they didn’t have the necessary financial advice they needed up front. None of those outcomes necessarily creates more employment, more growth or a stronger small-business economy, and yet they can be the entirely rational response of somebody who looks at the rules and thinks, “Do you know what? I really can#t go there.”
The irony is that the government quite rightly wants to prevent people from creating artificial arrangements purely to avoid employment taxes, but there is a huge difference between stopping artificial arrangements and making legitimate commercial arrangements feel like they are inherently suspicious. A genuine employee being paid through a personal service company simply to obtain a different tax treatment is one thing; a small organisation buying specialist services from an independent professional is something else entirely. The challenge ought to be identifying the difference without creating such a level of uncertainty that the smallest businesses become frightened of using perfectly legitimate forms of expertise.
And that is why I describe the whole thing as feeling like a stranglehold on small business. It is not simply the amount of tax that bothers me, because businesses have always had to pay tax and I am not arguing that they should not. It is the cumulative effect of every decision becoming surrounded by another layer of rules, another potential liability, another compliance question and another situation where the business owner has to ask whether the perfectly ordinary commercial decision they have just made might somehow be interpreted differently by a government department after the event. Who can operate a business whilst having a sword of Damocles hanging over their head – we all know that sickening feeling when an unexpected brown envelope drops on the doorstep
There is something deeply backwards about creating an environment in which a small business can have the money, identify the expertise it needs and be perfectly willing to pay a professional a decent amount for that expertise, but then spend more time worrying about how the engagement will be classified than actually benefiting from the person they are trying to bring into the business. At some point the state needs to recognise that not every business owner is sitting there constructing elaborate schemes to deprive the Treasury of tax; sometimes we are simply trying to run a business, buy the skills we need and make sensible decisions about where our limited money is best spent. And truth be told, you’re going to get your pound of flesh because the CFO we would like to hire is not exactly going to cook his books is he?
I am therefore rather relieved that I do not have to navigate all of this anymore, because I genuinely do not know how somebody starting a small business today is supposed to look at the mountain of tax, employment, reporting and compliance obligations and think, “Yes, this is exactly the environment in which I feel encouraged to grow.” The government’s own small-business research demonstrates that regulation and rising employment costs influence recruitment and investment decisions, with the Federation of Small Businesses reporting that two-thirds of surveyed small employers said they would recruit fewer staff in response to proposed employment measures.
And perhaps that is the question that ought to be asked much more often: not simply “how much tax can we collect?” but “what behaviour are we actually creating by collecting it in this particular way?”
Because if the answer is that small businesses become increasingly reluctant to employ people, nervous about engaging specialists, dependent on expensive intermediaries and more and more exhausted by trying to remain compliant not to mention keeping up with all the rules and changes, then perhaps the problem is not that small businesses are failing to understand the system; perhaps the system has become far too onerous and complicated for the people it is supposed to be helping to operate within it.
