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IR35 changes driving contractors out of self-employment

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Written by: Emma Lunn
22/10/2021
More than a third (35%) of contractors have left self-employment since the changes to IR35, either moving into permanent employment, retiring, working overseas or simply not working, according to the Association of Independent Professionals and the Self-Employed (IPSE).

IPSE found that of those who remain, more than a third (34%) are now working through unregulated umbrella companies and another third (36%) are working through engagements deemed ‘inside IR35’.

What is IR35?

IR35 or the off-payroll working rules can apply if a worker or contractor provides their services through their own limited company or another type of intermediary to the client, but who would be an employee if the intermediary was not used.

Self-employed contractors typically work under this kind of arrangement to reduce the tax they pay. Such workers are called ‘deemed employees’ by HMRC.

The IR35 rules aim to make sure that a worker, who would have been an employee if they were providing their services directly to the client, pays broadly the same tax and national insurance contributions as an employee.

In the past the contractor decided whether their working arrangements fell inside or outside IR35. But since April 2021, their employment status has been determined by the client. If the client decides that IR35 should apply to the engagement, payment to the contractor will be taxed at source.

Financial consequences

IPSE says that working inside IR35 not only leaves contractors essentially in no-rights employment; it also has significant financial consequences. Four out of five (80%) contractors working inside IR35 said they had seen a drop in their quarterly earnings – by an average of 30%. A quarter even said their income had dropped by more than 40%.

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 10 (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.

One in four (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 – most likely because many umbrella companies are passing this cost onto contractors through a deduction from their day rate.

‘Devastating impact’

Andy Chamberlain, director of policy at IPSE, 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.

“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.”

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