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A tale of two entrepreneurial generations

28th Oct 2016
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Recent news that many self-employed people are (relatively) worse off than they were twenty years ago doesn’t come as a great surprise. With the fact that we have around an extra two million self-employed than five years ago gives us a clue to what is happening.

For many years, the ratio between employed and self-employed was stable, but advances in technology, with the internet leading the charge, started to affect this balance some ten years ago, with some sectors, such as IT consulting, and marketing/design consultancy finding that operating a business from home was, finally, a realistic option.

But still, this new wave of entrepreneurs was still largely made up of individuals making a positive decision to leverage their professional experience, and who had the sort of personal assets (property and pension) to back the new venture as it built up revenues. 

All that changed with the recession, however.

Post-recession a toxic combination of factors created a boom in the ‘reluctant’ self-employed. This has combined with the fact that no government could resist making it more and more expensive to directly employ someone, so in a low margin cost competitive economy the only answer to the problem of growing your workforce and maintaining profit is to make everyone self-employed.

So, we have a generational shift between the willing (pre-recession) and less often willing (post-recession, post minimum wage, living wage, auto enrolment for pensions, apprenticeship levy etc.) self-employed. The first are mainly entrepreneurial and have ambitions, and more importantly assets, to back their choice.  The second are forced by circumstance into accepting a status which doesn’t reflect their real employment circumstances. They can be sacked, for instance, and need to obey the instructions of their ‘employer’ while being denied the advantages that employed status would give them. 

As a result, the post-recession ‘contracting’ self-employed are being denied some pretty basic stuff.  Not just employment rights and protections, the real long term problem with two million odd people just about surviving is that it’s yet another demographic time bomb.  Our pre-recession generation largely had the opportunity to accumulate some assets, some pension and maybe a home.  These assets tend to grow over time and become the cushion to enable the start of a new business.

Post recessioners have no such luxury. Those that do have a mortgage are probably just surviving because of historically low interest rates, the remainder are unlikely to be generating any income surplus sufficient to enable meaningful contributions to a pension, and without the addition of an employer’s contribution to boost the overall amount, the task of saving sufficiently for one’s retirement based solely on what you can put aside from this week’s Deliveroo earnings is daunting, if not impossible.

So, the worry is that we are not actually experiencing a sudden entrepreneurial explosion, but for lots of people, self-employed is the only option. Do I have any answers?  Suggestions maybe. 

Firstly, help small businesses grow by stopping making it so ridiculously expensive to employ people.  What you lose in employers NI you will gain back twofold in PAYE. 

Second, dial back on regulation across most sectors, but particularly financial services.  It has cost hundreds of thousands of jobs for very little gain.

Third, re-define self-employment. HMRC has a definition, but this seems to be roundly ignored by many businesses.  I’m saying, here and now, if you have only one source of income, or its your major source, and you must follow the instructions of a superior, and you can get fired, you are employed.

Fourth, and this is where I think accountants have a role to play. We need to constantly remind the small business owner/SME that saving into a pension is the single most tax efficient way for them to accumulate capital that remains available to support business growth without penalties of loss of tax privileged status. And, if more accountancy firms produced management accounts for their smaller clients, many of these clients would truly see how advantageous it is to make additional pension payments before the year-end to reduce their corporation tax bill. Also, pension contributions for the self-employed/SME don’t always have to negatively impact cash flow.  Facilities such as Pension-led funding still allow for the cash to be cycled back into the business for day to day operational use.

Finally, I would also devise a series of real tax incentives for businesses and their shareholders that promoted a culture of high quality employment, encouraged staff savings and led individuals on a path that might allow for real, genuinely elective self-employment at a later point, preferably when they could choose, plan, and deploy their assets to help them succeed, not when their only options are self-employment or starvation.

 

 

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