HMRC lacks detailed information about the self-employed population beyond the bare tax figures, but new IFS research has attempted to fill that gap, as AccountingWEB columnist Wendy Bradley explains.
Poor understanding of the make-up of a population can lead to catastrophic tax policy development when the assumptions are wrong, such as happened with the VATMOSS fiasco.
I therefore welcome research by the Institute for Fiscal Studies (IFS) that may provide more insight into who and how many self-employed there are, and how well they are doing in this economic climate.
Many types of self-employed
The IFS has analysed HMRC’s administrative data sets, and initially labelled all self-employed as "business owners". I have a problem with this premise.
The behaviours and needs of business owners, the self-employed, the gig economy worker, the employee with a "side hustle" and all the other ways people make a living, or supplement a living made elsewhere, are not necessarily captured in the kind of revenue data that categorises them all as "micro" or "nano" businesses.
For example, the research tells us that since 2000/01 the number of employees is up by 15%, the self-employed up by 25%, and directorships up by 100%, but what does this really tell us when the same person can easily play all three roles?
You would also need to know the total population figure (maybe there are just more people?) to know whether the overall trend is for a greater proportion of people to work for themselves rather than for an employer.
We learn that 25% of self-employed people also have some income from employment. But the authors confirm that their data showing business and employment income in the same tax year could just as easily be people ceasing work and starting self-employment (or vice versa) as holding both roles simultaneously.
The report also makes no mention of pension income. Does the 25% increase in self employed include people with income from pensions who are also self-employed?
What sort of people are self-employed?
The paper has some analysis of who the self-employed are but it is disappointingly thin. We learn that:
- 51% of the 26.6m employees are male
- 66% of the 4.9m self-employed are male, including
- 67% of those who are sole traders.
We also learn the average age of an employee is 40 and of a sole trader is 46. Given the increase in pension age I rather suspect this reflects the cohort of people born in the 1950s trying to ease into retirement by reducing their employment hours without being able to draw on their state pensions. But the report is silent on any possible links between pension income and self employment.
Where do the self-employed come from?
I take issue with the assertion that business owners are "increasingly foreign-born".
This seems to be derived from a belief that you can tell the year the NINO was issued from its first two digits and that linking that to a person's age can tell you whether the NINO was issued after the usual age of 16 and that this of itself implies foreign origin.
This may be a broad-brush way of arriving at a proxy for the proportion of foreign-born taxpayers, but at the individual level, it is dangerous nonsense. "Contrary to popular belief, the numbers of a person’s NINO do not represent a code that reflects their age, employer, address, etc." (House of Commons briefing paper)
I also take issue with the IFS research on page 19 where it says "Evidence-based on HMRC audit data suggests that 60% of those declaring sole trader income under-reported the amount of tax due." This is derived from the IFS briefing note I looked at here and which says no such thing.
The relevant passage says "More than one-third of self-assessment taxpayers (36%) who were randomly audited were found to have errors in their tax returns that led to underpayments".
The 60% figure seems to come from the later comment that "Most non-compliant taxpayers (60%) owe less than £1,000" but that is clearly 60% of the 36% who had errors and not of the entire taxpayer body, surely?
The main thrust of the IFS research is to tell us that since the financial crisis businesses have been suffering financially. In the four tax years from 2007-8 to 2011-12, there was a fall in mean and median profits of the self-employed of 23% and 16% respectively.
It is helpful to have one's impression confirmed by actual data, but it seems an obvious result of the 2008 crash. The economy didn't bounce straight back. HMRC data has a time lag built-in, so we can't tell whether the small business population has recovered yet, but frankly, I'm not holding my breath.
Data but no insight
The IFS research seems to confirm that HMRC has lots of data but not much information.
There is also an Office of Tax Simplification scoping document which includes a call for evidence on the "simplification of tax reporting and payment arrangements for self-employed people and landlords of private residential property".
It will be well worth our time to contribute to this OTS research and increase the information flow.
About Wendy Bradley
Wendy Bradley is a retired tax inspector, now working as a freelance journalist.