Empowering the Freelance Economy

IR35: it’s driven 35% of contractors out of self-employment

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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?

Photo by Ron Lach from Pexels
  • 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. 

If you are a contractor that has been pushed out of self-employment, how have you adjusted to your new circumstances?

11 Comments
  1. tim renicar says

    Closed company , gone through umbrella , but mainly stopped working and semi retired. Been contractor for 30 years

    This will impact UK economy, as I will be reluctant to take a job/contract away from home, as no expenses. Therefore less mobile workforce.

    Previous company, all contractors were forced to go through an off shore IT provider, so not directly contracted by final company, and of course rates reduced

    .

  2. Belinda Brooke says

    IR35 is not killing self employment. Self employment where it is genuine is as safe as it has ever been. IR35 has been around for 20+ years. What is being stopped by the Off Payroll rules is freelancers claiming to be self employed for tax when in reality they are not. Where a contractor is undertaking work on a genuinely self employed basis the IR35 status determination (and these tests remain more or less unchanged since 2000) will support that. But the reason many employers are issuing inside IR35 SDSs or electing not to go down the SDS route at all is that they know the vast majority of the roles they had historically treated as contractor roles are in fact BAU roles. Freelancers were getting away with treating the income from these roles as outside IR35 because, pre Off Payroll, HMRC did not have the manpower to monitor compliance. Over time those contractors assumed an entitlement to treat themselves as self employed when a more stringent application of the IR35 tests would not have allowed that. And this was done to the detriment of many employed earners who were effectively subsidising the contractor population through their NICs and suffering long term pay rise and opportunity stagnation while their employers put aside budget to secure contractors. Much is made of the fact that contractors do not have employment protection or benefits. But the earnings of many contractors have historically more than made up for the benefits many employees have and no employee with under 2 years’ service has any employment security over and above the sort of contractual protection most contractors have. Added to this contractors don’t appear on the client hirer’s headcount for P&L purposes which was a positive result for the shareholders. So, under the old regime everyone except HMRC and employed earners was a winner. Given the reasons HMRC collects taxes and employed earners pay it, I’m not sure that was fair. The IR35 regime could certainly use some improvement but the implementation of the Off Payroll rules was a correction that was long overdue.

    1. Ray Trew says

      Good retort but i would go further and say IR35 wasnt even necessary it was introduced in 2000 and was a sledgehammer to crack a walnut. 80% of those who were so called exploiting the physical advantage of a corporate structure were engaged via a recruitment agency and we had at that time the Agency Rules ICTA 1988 section 134 which is now ITEPA 2003 s44 and both clearly state all remuneration received from a Agency should be taxed under schedule E (PAYE). Agencies encouraged use of PSC’s for own financial gain by saving paying employers NIC’s. If HMRC had polices this sector and enforced legislation that was in place IR35 would have never got on the statute books

      1. Ray Trew says

        Addendum to my last post

        Polices should have read policed

        In addition we would have had no avoidance with disguised remuneration schemes or indeed the loan charge. HMRC have to accept responsibility for their own failings

    2. Robin de Villiers says

      No IR35 is killing self-employment. There are fewer contractors. Those contractors are more likely to be associated to umbrella companies; those engagements are more limited in choice and renumeration. There are fewer risks now which reflects the static nature of the relationships.

      You might argue that those people are no worse off; I would disagree. You might argue that they are not entitled to the tax relief; you might have an argument there (I would argue that dividend tax rates should be the same as PAYE, then all of this becomes irrelevant).

      But SELF employment is most certainly less than it was.

  3. Anthony says

    I have been contracting for 22 years and have taken 16 different contracts/projects during that time, all as a mechanical engineer, my case was shared by my MP in parliament and was dismissed by Javid and then Rishi both using the same blanket reasoning, two people working along side each other should pay the same tax…. In March I was incorrectly assessed by my client as inside IR35, they refused to provide me with any reasons or justification, I challenged HMRC as to what ‘legally obliged’ means as at the time they cited this was the clients responsibility, the response from HMRC “it cannot be challenged”
    I immediately left the contract and began working for a German client, I have now joined a UK company as a permanent employee. My income is roughly 50%, but I now get 30 days paid holiday, full healthcare and we plan to downsize and semi retire in 5-10 years
    Whatever happens, I’ll spend my money so when I’m in need of healthcare I will not have a house to pay for it so the government will have to.
    This shortsightedness will as predicted cost this government dearly, and even though it was Labour who dreamt up this misguided and downright immoral legislation it was this stupid Conservative government who implemented it…. Oh and I was a conservative voter… never again!!!

  4. Sara Brittlegill says

    Fed up with dealing with agencies and accountants (having been left to deal with HMRC on my own) I decided to take a permanent position. I was lied to from day 1 and left 9 months later to return to contracting, umbrella only. Lower rates and a lot of confusion have ruined contracting for many of us. Companies want a contractor to do 3 roles in one, with rates no higher than a junior. The whole thing stinks.
    If the government had wanted to hamper the market, they could not have planned it any better.
    Earlier this year I was offered an inside IR35 contract, then changed by HR (when the key decision-maker was back from holiday) to outside IR35 and had a very bad response from the public service client when I said I only do umbrella so outside doesn’t benefit me at all, and I refused to take a 20% cut in my day rate.
    Let down by everyone.

  5. Ray says

    Totally agree the system is strangling contractors my monthly costs to get to work are expensive and I can’t claim them back through the unregulated umbrella were forced to use, seems with apprentice levy and us paying the umbrellas insurance fee etc it’s becoming unworkable for many overseas workers like myself , I get calls from agents nearly every day it seems a lot on practitioners have left the contract world and gone back full time to shield themselves from covid and other things but this has created clearly a very big void in the environmental health contract world interestingly the umbrella costs across the year are more expensive than using an accountant once per year !!! So it shows the government is sponsoring these get rich quick umbrellas !!! It’s not raining so I don’t need or want an expensive umbrella !!!!

  6. Ray Trew says

    Addendum to my last post

    Polices should have read policed

    In addition we would have had no avoidance with disguised remuneration schemes or indeed the loan charge. HMRC have to accept responsibility for their own failings

  7. robin de villiers says

    When IR35 came into effect, it was February 2020. The bank I was working for made a blanket declaration that all contractor roles were now PAYE roles under resourcing houses. They enforced that policy at the end of Feb 2020. The government then postponed IR35 until March 2021. For all of us contractors, this was too little too late.

    I left the bank and am now still working outside IR35, but my day rate is far less. Working overseas is much more appealing these days. Renumeration in the UK suffers arbitrage against all other countries demanding IT skills. Now that the UK is penalising it’s IT workers, how should I react? One of my colleagues is now working in Germany. The rest of us have been stuck at home under Covid.

    Being a contractor in IT has required that I change jobs every 2 years. This has both positives and negatives. Positives being that my exposure to different problems is now much broader. I’m simply better for it. Permies I work with show their roots. The downside is that contractors build up relationships which is good business and then are effectively prohibited from working with erstwhile clients again. This makes no sense from a business standpoint.

    The resourcing houses are now in a position to bid down contractor PAYE day rates, while bidding up supplier rates and taking the difference. In the past the difference has been claimed by recruitment companies that had to compete to attract your engagement. Now since you are affectively a permie working for one of those houses, they can re-roll you into other engagements for their clients. No choice for you. Less work for them, so more profit for them. Less variety for the contractors, more stagnation, less mobility, less pay and also less compensation in terms of the benefits permies get.

    1. Alex says

      Same here. Most new IT contracts are inside IR35, however advertised at the same market rates, which means 20-25% pay cut. This effectively prevents UK businesses hire top talent contractors. Some companies have reacted by increasing the daily rates, others are still not getting it. I can tell numerous stories of top professionals leaving their executive contracts because of the IR35 blanket enforcement. These positions are being assigned to junior workers and the results of this would be evident in few months time.

      A word about working abroad – IR35 still applies to you as long as you are UK tax resident. So working in Germany will not help.
      Contracting is dead.

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