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One in three contractors driven out by IR35 changes

26 October 2021

New research by IPSE has found that changes to IR35 tax rules have had a devastating effect on UK contractors, prompting many of them to leave self-employment altogether.

A survey of contractors by the Association of Independent Professionals and the Self-Employed (IPSE) has found that 35% have left self-employment since the changes to IR35 came in, either moving into permanent employment, retiring, working overseas or simply not working.

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 leaves contractors essentially in no-rights employment, according to IPSE. It also has significant financial consequences: 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%.

A significant problem seems to be the implementation of the rule changes - clients are now required to give contractors a Status Determination Statement (SDS) to confirm their IR35 status, but 38% of contractors polled said their clients had not done this.

The findings also show that:

  • 21% of contractors said their clients had blanket assessed all engagements as inside IR35;
  • 11% said their clients had blanket banned contractors altogether;
  • 34% said they were now having to work through unregulated umbrella companies for their clients;
  • 23% of all contractors working through umbrella companies said they are dissatisfied with their umbrella company, compared to 46% who are satisfied.

Andy Chamberlain, IPSE director of policy, said: "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."

For those that remain, IR35 changes have made things "needlessly and enormously more complex" said Chamberlain. "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."

He added: "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."

Written by Rachel Miller.

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