We all saw the signs, but now new research by IPSE has proven it: IR35 is killing self-employment in the UK.
The member group’s research found that over a third of contractors (35%) have left self-employment since the changes to IR35, either moving into permanent employment, retiring, working overseas or simply not working.
The findings also noted that of those who remain, more than a third again (34%) are now working through unregulated umbrella companies and another third (36%) are working through engagements deemed ‘inside IR35’.
“Working inside IR35 not only leaves contractors essentially in no-rights employment; it also has significant financial consequences: four out of five contractors (80%) working inside IR35 said they had seen a drop in their quarterly earnings – by an average of 30 per cent. A quarter even said their income had dropped by over 40 per cent.”IPSE
What’s core to the IR35 problem?
- Clients being lax on Status of Determination Statements: under the new rules, clients are now required to give contractors a Status Determination Statement (SDS) to confirm their IR35 status, but nearly two out of five (38%) said their clients had not done this.
- Blanket bans on contractors that want to remain independent though a limited company structure
- Contractors forced to join unregulatd umbrella companies that do not contractors’ best interests at heart
- Umbrella company contractors often cannot claim expenses
One in five (21%) contractors said their clients had also blanket assessed all engagements as inside IR35, while one in ten (11%) said their clients had blanket banned contractors altogether. Another 34 per cent said they were now having to work through unregulated umbrella companies for their clients.
One in four (23%) of all contractors working through umbrella companies say they are dissatisfied with their umbrella company, compared to 46 per cent who are satisfied.
One key area of concern is business expenses, which most contractors now cannot claim from their umbrella company: 55 per cent were dissatisfied with this.
Another key concern is the cost of Employer’s National Insurance: 33 per cent said they were dissatisfied with this – most likely because many umbrella companies are passing this cost onto contractors through a deduction from their day rate.
“There is one word and one word only for this situation: a mess. Now, government must clear it up. We are urging government to review the situation in the contracting sector and be open to radical steps based on that – including, if necessary, repealing the changes altogether. Government must also urgently set out detailed regulations for how umbrella companies should operate and also work to clear the confusion across self-employment by clarifying when it is right for people to operate as sole traders, employees or limited companies.Andy Chamberlain, Director of Policy at IPSE (the Association of Independent Professionals and the Self-Employed)
Contractors “hamstrung” by IR35 changes
Many industries and not just the IT sector have been impacted by the IR35 changes and the reactions from hiring companies. One Freelance Informer reader wrote in saying:
Mr Sunak needs to take skilled electricians outside IR35 or none of them will vote Conservative in the next election.
Andy Chamberlain, Director of Policy at IPSE (the Association of Independent Professionals and the Self-Employed), said: “Contractors are the most productive part of the crucial self-employed sector, which overall contributes more than £300bn to the UK economy every year. Not only that: they are absolutely vital for economic recovery, providing invaluable flexible skills to businesses getting back on their feet and adapting. But just when this sector is needed most, it has been hamstrung by the changes to IR35.”
Chamberlain said that the research shows the devastating impact the changes to IR35 have had on contractors, needlessly compounding the financial damage of the pandemic and the unnecessary gaps in support. Now, just when contractors are needed most – amid mounting labour shortages across the UK and particularly in haulage – government decisions have driven out a third of the sector.
“We are keen to work with government on this, but, as this research shows, it must take this seriously: it must recognise the mess the changes to IR35 have created and work to get a grip on the situation,” said Chamberlain.
Is there a silver lining?
Dave Chaplin, CEO of IR35 Shield has a much more optimistic outlook on the IR35 situation:
“Whilst freelancers have succumbed to the triple whammy from the pressures of Brexit, the pandemic and the latest incarnation of IR35, our experience suggests this is a bottoming out of the market, and that it is starting to grow again,” said Chaplin.
The veteran IT contractor turned IR35 specialist believes that many firms chose what they say as a considered and easy option, by attempting to remain cost-neutral and risk-free by pushing a blanket ban on contractors from operating via PSCs.
“But some have since realised this has put them at a disadvantage in the competing market for talent compared to firms who have implemented processes enabling them to continue to hire contractors on an ‘outside IR35’ basis,” said Chaplin.
“For firms with large numbers of contractors, from a practical perspective they concluded they needed to press the ‘IR35 reset’ button and ban PSCs in the short term whilst they got their house in order, and are now ready to hire again, having also implemented a robust process.”
IR35: The death knell for UK’s highly skilled, digital future
For many contractors, the damage has been done, so will see little light at the end of the tunnel, especially those that felt they had no option but to retire early or leave the UK. We would like to see some solutions arise so that contractors are not penalised financially or pushed out of self-employment.
Qdos CEO, Seb Maley, on the situation and how the upcoming Autumn Budget could impact millions of self-employed:
“Millions of self-employed people and small business owners are bearing the brunt of the government’s post-pandemic tax strategy. Whether it’s the social care levy, IR35 reform or the incoming corporation tax increase, a raft of tax reforms are making things even more difficult for those working for themselves.
“These short-sighted decisions may also deter people from starting businesses, risking a lost generation of self-employed people who would contribute billions to the economy.