Theresa May missed an opportunity to tackle corporate governance, but she can’t afford to do the same with the gig economy

Ministers admit privately that the Treasury is “spooked” by the implications for tax revenue. The rise in self-employment calls into question the traditional role of employers as tax collectors for the state

Click to follow
The Independent Online

Theresa May is already finding that turning rhetoric into policy is harder than it looks. The Government’s green paper on corporate governance, published on Tuesday, watered down two proposals outlined by the Prime Minister this summer. Putting workers on company boards has been replaced by looser advisory panels or having an existing non-executive director represent the workforce. On executive pay, a plan for binding annual shareholder votes may not now apply to all companies.

The changes followed intense pressure from business. May could learn a lesson from New Labour ministers, who belatedly realised it is better to under-promise and over-deliver rather than the other way round.

Now another government pledge – to ensure “fairness for everyone in work” in the gig economy – could enhance the disappointment factor. At Prime Minister’s Questions on Wednesday, May said her plan to get the right legislative framework for the economy of the future showed that the Conservatives are “the party of working people”.

Theresa May backs away from 'workers on company boards' plan

The Government has asked Matthew Taylor, chief executive of the Royal Society of Arts who headed the Downing Street Policy Unit under Tony Blair, to review how employment practice should keep pace with today’s business models. It will look at the implications for workers’ rights and responsibilities, and employers’ freedoms and obligations.

The issue was thrown into sharp relief in October, when two of Uber’s 40,000 drivers won an employment tribunal claim that the company was acting unlawfully by not paying holiday or sick pay. Uber insists its drivers are self-employed and will appeal.

Astonishingly, the ranks of the self-employed have increased by 45 per cent since the year 2000 to 4.8 million – one in seven of the workforce. When Conservative ministers trumpet their record in creating 2.7 million jobs since 2010, they don’t tell us that a third of them are probably self-employed.

The Government must strike a difficult balance between embracing innovative ways of working, having a skilled and flexible workforce – which will be even more vital after Brexit – and ensuring that workers have decent wages and rights.

There is another reason why the Government is taking a close interest in this issue. Ministers admit privately that the Treasury is “spooked” by the implications for tax revenue. The rise in self-employment calls into question the traditional role of employers as tax collectors for the state. An employer currently pays 13.8 per cent national insurance contributions on their employees’ wages, but nothing if they are classed as self-employed. HM Revenue & Customs is looking into companies, including delivery firms, accused of forcing workers to become self-employed, or using agency staff, to cut their costs and erode workers’ rights.

Similarly, the current tax system encourages people to set themselves up as a one-man band and pay themselves in dividends, which are taxed more lightly than earnings. Forthcoming cuts to corporation tax on company profits will compound the problem.

The Office for Budget Responsibility estimates that the changing labour market will cost the Treasury £3.5bn by 2020-21. No wonder Philip Hammond wants to ensure that “the taxation of different ways of working is fair between different individuals, and sustains the tax base as the economy undergoes rapid change.” Even without the £59bn bill for Brexit, there is enough pressure on the public finances from the ageing population. Rising NHS, long-term care and state pension costs between 2020-30 could require the equivalent of doubling inheritance tax, capital gains tax and stamp duty.

Taxes will probably have to rise just for public services to stand still. So it is in all our interests for the Treasury to preserve its tax revenue. However, in setting new rules for the new economy, the Government must not put all the burden on self-employed workers by raising their taxes; as May recognises, many of them are already struggling to get by. Although some of the new army of self-employed welcome the freedom to work flexibly, for many it is a necessity and they would rather have a full-time job with rights such as holiday and sick pay and parental leave.

Ministers should not be afraid to force companies to provide such a safety net rather than wriggle out of their responsibilities to their workforce. They should also scrap tax incentives for firms to use self-employed workers. Above all, the Government will have to show more backbone than it did in the face of the lobbying by business against May’s plans for corporate governance.