Will SEPA be the saviour for the gig economy?

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Employment trends are changing rapidly.

In the UK people are showing an increasing propensity to work for themselves. Recent figures from the ONS reveal that in November 2016 4.77 million people in the UK were self-employed.  This is an increase of 25%, when compared with comparable figures from 2008.

Whilst there is a split in individuals who choose to be self-employed, and those who do so out of circumstance, this is a fast changing macro economic trend that is being put under greater scrutiny from a policy perspective. A recent example of this was the contentious increase, and subsequent withdrawal, of increasing National Insurance Contributions for self-employed people.

A related issue, which has had less media coverage, but could have equally as far ranging implications for freelancers is SEPA (Sole Enterprise with Protected Asset or Self Employed with Protected Assets(s)), a new type of vehicle which would allow sole traders to be afforded with some of the protections of limited companies.

What Is A SEPA?

The concept of SEPA was first explored in depth by the Office of Tax Simplification (OTS), in a research paper published in November 2016.

The paper explores how the finer details of such a trading vehicle would work.

In essence a SEPA is an enhanced form of sole trader status. The main difference between a SEPA and a sole trader is that the former would allow the business owner to ring-fence their owned home, and possibly other significant assets (i.e. pensions), from any liabilities arising.

Conversely, sole trader status means that business owners can suffer from unlimited personal liability of personal assets should their business encounter adverse trading conditions.

The tax status of SEPAs would be the same as sole traders, requiring the business owner to pay income tax and NICs, as opposed to corporation tax.

Why is there a demand for SEPAs?

This is due to a combination of demographic and social changes. The profile of people working for themselves is in transition due to the rise of “gig economy” platforms such as Uber and Deliveroo, as well as older people setting themselves up in business in order to provide for their long term futures.

It is hoped that SEPAs will encourage enterprise by making administration easier for business owners. This is supported by data from the OTS’s paper which indicates that one of the main reasons people do not choose to incorporate their businesses is due to this burden. Of the 323 businesses surveyed in the paper, around a third thought about and dismissed the idea of becoming a limited company, with over 70% citing the extra paperwork required a disadvantage.

There is genuine appetite for SEPA, with 68% of sole traders questioned being interested in the scheme.

Emily Coltman, Chief Accountant at FreeAgent, and a contributor to the OTS paper believes SEPAs would provide a much needed compromise between sole trader and limited status.

She says, “Many would be business owners are not yet ready for the complexity of operating through a limited company, but the idea of potentially losing their personal assets if the business is sued is a frightening one. The SEPA model would enable them to at least protect their family home.”

What will be the administration requirements expected of SEPAs?

The administration of SEPAs will be similar to sole traders, with them not having to file statutory accounts at Companies House, or put together accounts on an accruals basis. The former is viewed as being a major advantage for SEPAs over alternative structures such as LLPs, which require the publication of accounts.

Upon registration SEPAs would have to provide details around the trader’s personal details, contact information, information around the protected asset, and a declaration that the trader is eligible to register as a SEPA.

It is anticipated but some of this information will be held on public record, such as a unique SEPA number and the business name.

Will SEPAs be able to access finance?

It is currently unclear whether SEPAs would be able to access banking finance in the same way as a sole trader.

This could be more challenging due to the business owner having their main asset ring-fenced. This will make it harder to access loans above £25,000, which typically require a form of security.

Conrad Ford, CEO of Funding Options, an online business finance marketplace, believes introducing SEPAs will accelerate the demand for non-traditional finance products that do not require personal guarantees:

“The pervasiveness of personal guarantees in traditional business lending is one reason that alternative products such as invoice finance and merchant cash advances have grown in popularity, as they seek security from the trading activities of the business itself, rather than the personal assets of the owners.”

What’s next?

Whilst it is currently unknown whether SEPAs will be introduced, their discussion highlights how policy makers are drastically rethinking how the labour market operates and how to best manage tax collection. Don’t expect the debate around the future of work to end any time soon.

Nick Levine is a chartered accountant and freelance journalist, with a background in fin-tech who has written for Accounting Technician magazine.

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