Neither one thing nor the other: how reducing bogus self-employment could benefit workers, business and the Exchequer

Self-employment is a work status that many people aspire to. It can offer freedom, flexibility and the chance to build a business from the ground up. It boosts the economy by helping people find work, many of whom go on to become employers as their businesses grow.

Self-employment has become an increasingly mainstream form of work - today 4.5 million people work in this way. Our research shows that 75% of Citizens Advice clients who are self-employed are happy with their working status. We will be looking more closely at the life of self-employed people in upcoming reports.

As the labour market and the economy evolve, it is vital that the system for self-employed people adapts and modernises. The government has made positive progress with proposals to scrap Class 2 National Insurance and to move tax returns online. Alongside this, the government should address the lack of clarity around self-employment status as a priority.

Bogus self-employment occurs when workers are told they are self-employed when the legal tests would likely define them as employees. This phenomenon is made more common by the lack of consistency and clarity around the definition of self-employment: employment and tax law take different approaches.

Tackling bogus self-employment will help the government by ensuring it receives the tax and National insurance it is due; it will help responsible businesses who are undercut by rivals; and it will ensure that workers get the basic protections they are legally entitled to, such as the National Minimum Wage and holiday pay.

At Citizens Advice, we help over 80,000 self-employed people per year in our local offices and many more online. We have seen a steady increase in the number of people visiting our advisers to determine whether or not they are self-employed. This appears to be a growing but mostly hidden problem.

Neither one thing nor the other: how reducing bogus self-employment could benefit workers, business and the Exchequer [ 0.66 mb] addresses two key research gaps. First, it provides an estimate of how many people may be in bogus self-employment across the whole economy. Second, it shows the human impacts - in addition to effects on government and business - of bogus self-employment.

We surveyed nearly 500 of our clients to understand how they work and how they perceive their employment status. We then compared this to the law and to existing evidence that our network has gathered about incidences of bogus self-employment.

Our key findings are:

• We suspect that one in ten of the people that we surveyed are bogusly self-employed, with at least three markers suggesting that their self-employment is not genuine. If scaled up, this could translate into as many as 460,000 people nationwide.

• Each of these people may be losing on average £1,288 a year in holiday pay and are paying an extra £61 per year in National Insurance that they would not pay were they classified as employed.

• The Exchequer is losing, on average, over £300 per person who is wrongly categorised as self-employed, because the national insurance system currently incentives employers to categorise workers as self-employed, even when they are not. If scaled up, this means the government could be losing as much as £314 million annually.

• Responsible businesses, which do the right thing and want to employ their staff legitimately, face a competitive disadvantage to other employers which hire bogusly self-employed staff. The current lack of clarity around the definition of self-employment also means that many responsible employers struggle to be certain that they are categorising their staff properly.

We make recommendations that can help to redress the balance. These include extending to self-employed people some of the rights have been previously reserved for employment, reviewing the tax and national insurance system with a view to ensuring that self-employed people are treated fairly and strongly enforcing the rights of those who suspect that they are in bogus self-employment.