What Price the Knowledge Economy?

April 23, 2009

Britains politicians have been loudly trumpeting the view that the country’s future lies with the knowledge sector.

What is this knowledge sector? It is basically those industries based on technical skills and understanding rather than physical goods. It includes areas such as IT, engineering, training, accountancy, HR. It covers the whole area of interim management, where an individual is brought in to carry out a piece of work, troubleshoot, or fill a gap, purely because of their skills and knowledge. It includes those with specialist skills and understanding in a whole host of other sectors. It is, as the politicians say, the future, and it’s growing.

A feature of the knowledge sector is the demand for flexibility, as a significant number of knowledge-based requirements exist for a limited period of time, and the company with the need is unlikely to take on a permanent employee only to make them redundant after a short period. To some extent, the gap is filled by the larger consultancy companies but their needs can fluctuate depending on the contracts they win and the requirements of their clients. The flexibility in the knowledge sector comes from the growing population of skilled and experienced individuals who work as independent contractors.

Many people look enviously at the day rate charged by such contractors, because they mistakenly equate it with the contractor’s salary. They forget that, unlike an employee:

  • The contractor bears the risk of economic downturns and changing client requirements, when there may be long, unpaid, periods when contract work is not available, and earnings have to cover that period.
  • The contractor does not get paid holiday or sick leave or training leave.
  • Contractors pay the cost of their own training courses.
  • Since most contractors have to work through their own limited companies, they have in effect a second job running those companies, and that job is unpaid.
  • There are costs associated with running a company – fees for accountancy and running a payroll, multiple insurances, legal fees for checking contracts….
  • While an employee pays Income Tax and Employee’s National Insurance, a contractor working through a limited company pays  Income Tax  Employee’s National Insurance, Employer’s National Insurance, and Corporation Tax.
  • Contractors frequently work away from home. With contracts often lasting only a few months it would be both impractical and unrealistic for the contractor to sell up and uproot the family every time they sign a new contract, so the contractor has to bear the cost of temporary accommodation.
  • Many contractors need to provide their own IT equipment and software.

Start taking this into account and a contractor’s earnings suddenly look much lower than the day rate might suggest.

So if it’s not the money, what attracts contractors to the lifestyle? For many, it is the opportunity to focus on their professional area of interest and expertise, and they are prepared to take personal and financial risk to do so. It is not an easy life. As well as keeping up their technical skills, the contractor has to be company administrator, book-keeper and salesman, over and above the prime job of providing services to clients.

The knowledge economy is the future, and the knowledge economy needs a pool of skilled and entrepreneurial people to enable it to be responsive to the demands of the market place. It will be a major factor as Britain drags itself from the pit of the current recession. So what did the 268 pages of yesterday’s budget do to encourage this hard-working sector of the economy? Precisely nothing. In fact, less than nothing. Nothing to reduce the onerous taxation regime which targets the freelance contractor with ambiguous legislation, so that each and every contractor has to spend significant sums on legal and accounting advice on each and every contract, to clarify the tax position. Nothing to reduce the corporation tax burden. Not even a recognition of the value of freelance contracting to a flexible economy. Nothing to improve the existing situation, and nothing new to make things better.

There is an enormous gulf here between what the politicians say and what they actually deliver to support the knowledge economy. The DeliveryDemon is far from surprised that so many of her colleagues see the future as outside this country, and she regrets the environment which makes them take that decision.

[If you want to see how a 268 page budget can deliver nothing to support a sector which is critical to the recovery of Britain’s economy, the DeliveryDemon recommends PCG’s summary at http://tinyurl.com/PCGbudgetanalysis The DeliveryDemon’s head is still reeling from trying to disentangle the morass of overlapping numbers in the actual Budget document. And it’s too horrible to be a cure for insomnia.}