Last year’s IR35 tax changes on the public sector is behind a drop in business formations in 2017, according to data from Companies House, analysed by the Centre for Entrepreneurs.

The data showed that in 2017 589,008 new businesses launched in the UK, a decline from 657,790 in 2016. The Centre’s analysis suggests this is mostly a result of the government’s clampdown on “disguised employment” among public sector workers.

The Centre for Entrepreneurs stated that similar drops, in some cases over 70%, can be found in Wellingborough, Lichfield, East Hertfordshire, Bolsover and Central Bedfordshire. The data showed that these are all areas where contractor accounting firms have outnumbered entrepreneurial business formations in recent years. The Centre found 30,000 fewer companies registered by known contractor accounting providers in 2017 compared to 2016.

Julia Kermode, chief executive of the Freelancer & Contractor Services Association commented exclusively to Staffing Industry Analysts on the data, “It is no surprise to see these figures,” Kermode said. “The IR35 changes which were implemented in the public sector last April have been a shambles and what we have seen are knee-jerk changes driven by tax collection for the Treasury’s coffers which are starving the growth of the UK economy and strangling the flexibility of the labour market. Being an entrepreneur and setting up your own business should allow you the flexibility to choose the most appropriate structure for your circumstances rather than it being dictated by ill-conceived legislation.”

Dave Chaplin, CEO and founder of ContractorCalculator, also commented to Staffing Industry Analysts, “The large upsurge in limited companies being registered around April 2016 would have been due to the new laws introduced that made it difficult for contractors using PAYE umbrella companies to claim expenses and many would have been operating outside IR35 but used umbrellas for ease of use.  They would have moved to using a limited company so the legislation would not apply to them. This would have been a one-off activity, hence the upsurge and whilst the IR35 public sector reforms would have made a difference, it is unlikely to account for the large portion of that figure.”

“There is also uncertainty about when the public sector reforms will be rolled out to the private sector,” Chaplin said. “The taxes a contractor has to pay if they are caught by IR35 are more than if they were employed, because they have to pick up the bill for their clients’ employers’ National Insurance, despite not getting any rights. Given many one-man start-ups consist of providing services to one client on a personal basis, the threat of the legislation being rolled out is proving a massive disincentive for would-be-entrepreneurs from entering the flexible workforce. A move to do so would be like pouring glue on the flexible economy.”

Away from areas highly impacted by the clampdown, local authorities across Britain saw a slight fall in business formations last year. The CFE suggests two reasons for this. “Firstly, the clampdown is likely to have affected contractor accounting firms registered to homes and offices nationwide, not just the hubs highlighted above. Secondly, the cumulative effect of business rate rises and other regulatory burdens, combined with muted encouragement for entrepreneurs from the current government, could be discouraging individuals from turning their business ideas into action,” the CFE said.

The study added that Brexit is not deemed to have had an impact as there was no slow-down observed in the final six months of 2016, so it is unlikely to have directly impacted on formations in 2017.