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UK – Over a third of contractors have left self-employment since IR35 changes

UK – Over a third of contractors have left self-employment since IR35 changes

October 25, 2021

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More than a third, or 35% of contractors in the UK have left self-employment since the changes to IR35, either moving into permanent employment, retiring, working overseas or simply not working, according to research from The Association of Independent Professionals and the Self-Employed (IPSE).

The research also found that of those who remain, 34% are now working through “unregulated” umbrella companies and 36% are working through engagements deemed ‘inside IR35’.

Meanwhile 80% of contractors working inside IR35 said they had seen a drop in their quarterly earnings, by an average of 30%. A quarter said their income had dropped by over 40%.

According to IPSE, a significant problem seems to be the implementation of the rule changes by clients. 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.

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% said they were now having to work through “unregulated” umbrella companies for their clients.

Nearly a quarter (23%) of all contractors working through umbrella companies say they are dissatisfied with their umbrella company, compared to 46% who are satisfied.

One key area of concern is business expenses, which most contractors now cannot claim from their umbrella company: 55% were dissatisfied with this. Another key concern is the cost of Employer’s National Insurance: 33% said they were dissatisfied with this.

HMRC introduced IR35 reform to the private sector in April 2021 in the expectation that compliance will become easier to police, that end-users will take a more compliant approach to IR35 assessments and that they will be more likely to conclude that contractors are in scope, resulting in increased tax and national insurance contributions.

Andy Chamberlain, Director of Policy at IPSE said, “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.”

Dave Chaplin, CEO of IR35 Shield said, “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.

“Many firms choose what they may have considered the easy option, by attempting to remain cost neutral and risk free by pushing a blanket ban on contractors from operating via PSCs (personal service companies). 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,” Chaplin said.

Crawford Temple, CEO of Professional Passport, an independent assessor of payment intermediary compliance said, “My message to workers is that if they are offered something that is too good to be true then it is probably a disguised remuneration scheme that will set them up for financial difficulties in the future. HMRC already holds all the information it needs to stamp out disguised remuneration schemes and rid the industry of criminal activity but is not acting on it. As a result, the lack of inactivity has enabled more and more schemes to set up and more and more contractors duped into taking on significant personal financial risk as a result.”

Earlier this year the Department for Business, Energy and Industrial Strategy published its consultation report which confirmed that the new enforcement body will also regulate umbrella companies.