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Employees and Employers

January 6, 2013

There are essentially two types of working people in a modern balanced economy such as the UK, they are employees and employers (or alternatively entrepreneurs). The purpose of this note is to sharply distinguish them in order to draw conclusions about how policy ought to reflect reality. The essential difference I would like to draw relates to risk.

For the purposes of this piece, employees are people that work for a business, NFP or the government in all of its guises, employers are those that own it. Of course there are many who are employed that employ others, but I am distinguishing between those that take business risk and those that do not.

Employees are engaged by employers to perform a particular role. The nature of the engagement is set out in contract, whether formally or informally (occasionally this might be a verbal contract or alternatively contract terms are established through custom and practice).

Outside of the risk of dismissal, either by way of redundancy or by other means, the employees risk is limited. They do not have to become concerned about having to pay into the business to keep it alive should it find itself in trouble nor do they have to fear about the consequences of bankruptcy save for their potential loss of wages – for which the government provides a guarantee against loss. Of course, this is not to belittle the consequences of dismissal or redundancy – it is simply to point out that the consequences of business failure have a worst case scenario limited to having to find alternative employment.

Employers, on the other hand do not have that privilege. If a business goes wrong, the employer will face the full consequences of that failure subject to its own limited liability status. If they have invested their own money into the enterprise, they will lose it. If they have taken out a mortgage to create a start up, they will lose it. If the business doesn’t perform and there is no money to take out in drawings, they will not earn any money. If they have offered a personal guarantee against debts, their debtors will pursue them personally for the money in the event of failure. The employer is responsible for ensuring all bills get paid, the employer will ensure that all suppliers are paid, the employer will ensure the staff get paid even if there is insufficient income to cover the costs, if the employer is sued, the employer will have to paid the debt. If the government make hiring staff or employing staff more expensive, the employer must pay, if the government insist on forcing employers to pay pensions to employees, they must bear the cost, regardless of what that might do to their ability to earn a living from their own enterprise.

In short, opening a business in the UK is risky for the employer. If the business is successful, they will pay exactly the same tax as the people they employ unless they choose to leave their money in the business or take dividends from their company.

This seems asymmetrical. Clearly the risks are not identical but the tax contribution on an income tax basis is.

Whilst many politicians sit around discussing “fair share”, are they taking into account the “fair share” that relates to the risk of the enterprise? Does fairness allow for the failing employer to claw back past paid income from employees? Of course not.

The current benefit in the UK for starting up a business relates to relief on the sale of the entity – in the form of Entrepreneurs Tax Relief, but this relief only applies on the sale of the business. Whist it is running there is no such benefit.

It seems that during a period when the UK would benefit from new businesses, we need to be thinking about how we might get people to start up. We need innovators, risk takers, entrepreneurs and business people.  The risk/ reward ratio therefore needs to be addressed. We need for it to make sense for people to start a business – that isn’t going to come from thinking about tighter regulation, higher costs (in the form of compulsory pension provision).

Policy makers need to think carefully about making it easy to set up, not difficult. When the government decides on increasing regulation, they are cutting their own throat – handing competitive advantage to those we have to compete with. They slow growth, increase unemployment, and cause a net increase in economic misery. When the government introduce compulsory pensions next year – they should listen out for cheers from our competitors as business increases its outsourcing to foreign countries.

There should be serious and significant tax breaks for start up – in particular given the risks we are asking people to make. It is too often forgotten that more or less all of the UK’s income is created by private enterprise – they are the ones who pay for the teachers, doctors, nurses, civil servants, local government staff, politicians, roads, army, police and everything else. It is too often forgotten by those campaigning for gold plated pensions and pay rises in the public sector, greater benefits, housing allowances for those living in Chelsea, Hampstead and other expensive boroughs, that this has to be funded by the private sector at some stage. The lack of understanding from those demanding more as to where the money has to come from needs to be addressed.

The real entrepreneurs in the UK are not highly paid bankers or Civil Servants, they are staff – employed by others. The real entrepreneurs are those who accept risk. The real battle is therefore to distinguish between the Fred Goodwins and Bob Diamonds of this world from the Philip Greens and Richard Bransons. They are not the same and they shouldn’t be confused. The current political dialogue  is too simplistic in its rich/poor analysis when the real divide is between those who are prepared to stake their own money on an enterprise and those that stake others money.

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