For the first time since Spring 2010, a Labour Chancellor will deliver a Budget statement to the House of Commons. Government has so far painted a dour picture in the run up to the statement, with the Prime Minister warning that the Budget will be “painful” – leading commentators to conclude that tax rises and spending cuts are on the way. But after a painful few years for the self-employed, we’re hoping government can spare some positivity for the sector.

With this in mind, IPSE has written to the Chancellor, Rachel Reeves, ahead of the Budget with four key policy asks that would demonstrate an early commitment by the new government to meaningfully support the self-employed sector and properly grasp the issues that are holding them back.

Take the brakes off hiring freelancers by fixing IR35’s flaws

The IR35 rules are still causing significant disruption for businesses and public bodies needing to recruit freelancers and contractors for their operations. With the latest economic data showing that growth has stalled and hiring in a slump, we’ve renewed our call for government to cut the economic drag net of IR35 loose.

An IPSE survey of 1300 contractors in early 2024 found that 54% had walked away from an offer of work due to disagreements over the client’s IR35 determination. As a result, more than a third of UK businesses told us that it's harder to engage the freelance talent that they need to grow.

Meanwhile, four in five (79%) of freelancers have told us government tax policy is a factor limiting confidence in their business, whilst three quarters (76%) cited freelance hiring regulations. Taken together, it’s clear that the current IR35 rules are having a detrimental effect on freelancer business confidence.

The Labour government has signalled its intent to overhaul employment rules in the UK, including by potentially merging all employment arrangements into a single ‘Worker’ status with stronger rights from day one on the job. This will force us to figure out how to identify a ‘Worker’ in the modern workforce, and by extension, how to identify everyone else – better known as the self-employed. This is something that IR35 has failed to convincingly achieve, leaving freelancers, clients and even judges in disagreement.

The last government presided over a disastrous tightening of IR35 with the off-payroll working reforms. We’re asking the new government to meet with us to discuss how we can finally find a fairer and more effective way for people to work as freelancers without being subject to endless challenges from their clients and the taxman.

Giving taxpayers the support they need from HMRC

Until former Conservative Chancellor Jeremy Hunt intervened, HMRC were set to make its temporary phone line closures and restrictions a permanent fixture. With a change of party in government since then, we want the Chancellor to confirm that she has no plans to go back on this any time soon. Better yet, we want to see a reversal of the declining standard of service offered to the self-employed when dealing with HMRC.

Last year saw a steep increase in the proportion of calls to HMRC advisers going unanswered. In 2023-24, less than half (45%) were picked up, down from 53% the previous year, according to the National Audit Office. Meanwhile, ‘deflected’ calls – where customers are redirected to digital alternatives – jumped from 9.5% to 12.3% in the same period.

HMRC are right to say that a great many queries can be solved with the help of its existing digital services. But such is the complexity of our tax system – and the severity of penalties for misinterpreting it – that the self-employed need the assurance and support that comes from a conversation with an adviser.

Government has already spoken about its plans to step up tax compliance activity and clamp down on tax evasion. But government should also find room in its plans to turbocharge HMRC to also put the self-employed at ease about the next tax return season. At the next Budget , we’ve asked the Chancellor to rule out future attempts to close or limit access to HMRC helplines and set out a plan to reverse the decline in service levels.

Spare freelancers from a raid on the value of their business

The big talking point in speculation ahead of next month is Capital Gains Tax (CGT). As always, the Chancellor has taken care to not give anything away before Budget day. But with Labour’s commitment not to raise rates of income tax, national insurance and VAT, raising money from capital gains may be one of the few options left politically available. 

This could see the rates of tax levied on capital gains equalised with income tax, taking it from 20% to 45% in some cases. If this does happen, we’ve asked for one key tax relief to stay in place to protect freelancers from an unexpected tax windfall at the end of their careers.

Business Asset Disposal Relief (BADR) – formally known as Entrepreneur’s relief – caps the rate of tax paid on gains from the sale or closure of a business at 10%, for up to £1 million, effectively halving the rate. Having already been caught in the crossfire of successive Chancellors’ attempts to nullify the benefits of ‘unearned’ dividend income, a watering down or scrapping of BADR alongside a CGT hike would be yet another blow for company owning freelancers.

As its former name suggests, ‘Entrepreneur’s relief’ rightly ensures that building a successful business pays off when it comes to an end. Whilst not used extensively by freelancers, those with assets or cash left in their businesses as they approach retirement might use BADR to translate the value they have accrued during their careers into a meaningful source of income in retirement. Whatever changes are ultimately made to the wider CGT regime, we’ve asked the Chancellor to bear this fact in mind.

End the uncertainty over Managed Service Company legislation

Finally, we’ve asked government to acknowledge concerns over HMRC’s recent use of the little known ‘Managed Service Company’ (MSC) legislation.

Managed Service Company (MSC) legislation (ITEPA 2003, Chapter 9) – designed to tackle the use of ‘composite companies’ by groups of contractors – became a feature of the tax landscape in 2007. In the period of almost 15 years since, these rules remained uncontroversial, with specific parts of the contractor supply chain given exemptions from the rules to provide their services, including accountants.

However, in Spring 2022, HMRC issued its determination that two accountancy services providers (ASPs) were, in its view, ‘Managed Service Company Providers’ (MSCPs). This means that all of their contractor clients – around two thousand in total -  have been automatically deemed to be MSCs.

Having signed up to a specialist accountant to get their taxes right, the contractors now face life-changing tax bills. Meanwhile, the rest of the contractor sector remains in the dark about what this means for them, and whether their accountant could potentially be the next to fall foul of HMRC’s interpretation of the rules. 

We’ve called on government to urgently review the MSC legislation to ensure that its wording, and the approach taken by HMRC in enforcing it today, remain in alignment.

You can find out more about Managed Service Company legislation and what we want to see happen with it on our campaign page.