What do construction professionals and IT contractors have in common?

Not a lot you might think but they are both in high demand, they both work in sectors that attract entrepreneurs and they have both been hit by the unintended consequences of government tax and employment policies.

I read a newspaper story about Lisbon becoming the destination of choice for IT specialists, creatives and ambitious young people from Europe and beyond, just as London used to be. The Times said the number of young foreign graduates living in Portugal has hit record numbers with nearly one in 10 having been born abroad.

“For decades, London sucked in talent from abroad and our tech sector and creative industries boomed, with the network effect building on itself,” wrote Rohan Silva, a former Downing Street advisor turned entrepreneur. “Now the trend is moving in the opposite direction and Lisbon’s momentum is accelerating, with talented young people who would previously have moved to London now decamping to Portugal.”

Big Tech giants like Google and Facebook decided to build big new offices in London because that’s where the talent was. If the digital nomads are now heading south to sunny Lisbon, the government should be concerned.

The migration of young professionals will eventually mean fewer prestigious office schemes in central London, a slow down in the building of new apartments, less regeneration work and a serious dent in the wider economy from retail and leisure to construction and IT.

There is no escaping the fact that Brexit has made Britain a more hostile environment for mobile workers coming from Europe. Previously a professional from the continent could just turn up with a laptop and start earning. Literally tens of thousands set up limited companies using specialist online accountants who made the set up and running of a business accessible to anyone with a smartphone.

Now, because of Brexit, a European graduate new to the UK would need an employer to act as a sponsor hiring them before they arrived here, and they would have to apply for a visa.

And for those not affected by Brexit because they were already here, IR35 and the Managed Service Company legislation have made it unattractive to stay. Huge numbers have been forced to ditch their companies and move to umbrella companies, a move that has seriously hindered their ability to take on contract work and has reduced their earnings.

Just like in the creative and tech industries, construction professionals from abroad are leaving the UK and we will fail to attract the next generations unless something gives.

The number of self-employed working in construction fell from 914,000 in early 2020 to 799,000 in early 2022.

The Office for National Statistics said the overall decline in self-employment was “largely driven by people flowing out of self-employment to become employees”.

It is unclear how many are employed by employers, working through PAYE umbrella schemes or ‘none of the above’ but have dipped out of the UK altogether. Whichever it is, the result is the same: labour rates going up, a drop in productivity and less available talent.

Think of all the best site managers, CAD technicians, cost consultants, quantity surveyors, planners and estimators you have met, and ask yourself how many were freelancers.

They are invaluable to the industry and are far from being master criminal tax dodgers. The risks and rewards of self-employment clearly suited them better than the constraints of employment and now they have had that choice taken away.

Introduced last year, the new IR35 rules for off-payroll working have removed the bottom rung of the ladder for freelancers who otherwise could have built successful businesses, created wealth and generated tax receipts. The sting in the tail is those who used online Managed Service Companies to run their accounts through apps on their phones are being hit with retrospective tax bills they cannot afford to pay.

It feels like a string of government policies are targeting technical and creative groups and making life tough for industries like IT and construction. The knock-on will be a drop in the nation’s productivity and damage to the economies of cities like London, Manchester, Birmingham and Leeds. If the talent goes elsewhere, so will the investment which is why places like Portugal are rolling out the red carpet.

Rather than losing out, we need a rethink about how we attract, retain and tax the modern workforce that we desperately need.

One answer could be applying the CIS model of taxing upfront ‘on account’ to allow talent, both homegrown and from abroad, to work in technical and skilled roles as self-employed across all industries, an idea that I put to an official working in the Office of Tax Simplification back in 2014. Higher deduction rates could be taken from foreign workers with no need for sponsorship, and also for those who fail certain status criteria. If someone outstayed their welcome they would lose their tax refund, and we could scrap the IR35 and the Managed Service Company regulations for a much more straightforward process.

All of these problems are of our government’s own making so it just needs a bit of joined-up thinking and imagination from the policymakers to solve them. We best not hold our breath!