IR35 changes driving one third of contractors out of self employment

New research by IPSE (the Association of Independent Professionals and the Self-Employed) shows 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 research also found 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.

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 percent 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 percent who are satisfied. One key area of concern is business expenses, which most contractors now cannot claim from their umbrella company: 55 percent were dissatisfied with this.

Another key concern is the cost of Employer’s National Insurance: 33 percent 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.

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.

“This 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.

“Not only have the changes to IR35 driven large parts of the contracting sector out of self-employment: they have made things needlessly and enormously more complex for those who remain.

“Contractors now find themselves with myriad different and complex ways of working – each with its own pitfalls. They are now divided between those still managing to work outside IR35, those working through unregulated – and sometimes unscrupulous – umbrella companies, those working inside IR35 for less pay and with no rights, and others now on client or agency payrolls.

“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.

“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.”