Dr Madsen Pirie: Employees of small and medium businesses should be given the status of self-employed people under contract
Dr Madsen Pirie is the author of The Growth Agenda: The Self-Employment Option and President of the Adam Smith Institute.
Small and medium enterprises employ about half of the UK workforce and create roughly two-thirds of all the new jobs. The government recognises their role and wants to make life easier for them, specifically by deregulation. It has discovered, as its predecessors did, that this is not easy. Every regulation has its defenders, and every one has a fleet of civil servants sailing alongside it pointing to legal difficulties and Britain's EU obligations.
Today the Adam Smith Institute publishes the first salvo in its "Growth Agenda" series. This one covers the self-employment option, and its proposal calls for a complete change in the Treasury mindset. Instead of trying to sweep everyone out of self-employment and into employed status, they should allow and encourage all small and medium enterprises (SMEs) to give their employees the status of self-employed people under contract.
This would free small employers from the burden of calculating PAYE and National Insurance. Instead the employee would be responsible for his or her own tax and insurance bills. The Treasury finds it convenient at present to have employers do this, but it imposes a huge burden on them, a burden of time as well as cost. HMRC would need to find new ways of operating to collect these payments from employees, but there is no doubt that it would give a massive boost to enterprise and job creation.
Large employers can perhaps afford to fund statutory sick pay for up to 28 weeks, but constitutes a huge burden on SMEs. By allowing workers to be self-employed contractors, SMEs will no longer face this obligation. Workers would be eligible for Employment and Support Allowance, but the cost would not fall on the employer.
Self-employed people make their own holiday arrangements, knowing that they have to budget to pay for their time off, but for employees, statutory holiday pay is a burden that has to be borne by the employer. A switch to self-employed status would free employers from that burden, making them more cost-effective and more ready to take on staff.
A move towards self-employment in SMEs would sidestep the immense body of EU employment regulation. Most of it covers employed rather than self- employed status. It would free small firms from the burdens imposed by the minutiae of EU regulation, and could be done by the UK without breaking its commitment to comply with EU laws.
Current regulations make it very costly and time-consuming to set up and to expand new businesses and to take on more staff. A move to self-employed status for workers in small firms would unleash enterprise dramatically and lead to the creation of hundreds of thousands of new jobs. Many who would receive those jobs with self-employed status are currently unemployed and unable to find work. In many cases the jobs they want do not exist. Many of those taking advantage of the new self-employed status jobs would be coming off welfare rolls, moving from being a drain on public finances into people who earned money and paid taxes instead.
Given the state of the economy and the high levels of unemployment, the choice for many would not be between self-employed and employed status, but a choice between self-employed status and unemployed. Given the need to back up its fiscal policies with measures to boost economic growth, the self-employment option constitutes something that could be done immediately to bring rapid and favourable results.