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Tax changes for public sector contractors start to bite

30 January 2018

Tax changes for public sector contractors start to biteThe Government's tax clampdown on public sector contractors has resulted in a significant drop in the number of new company formations, according to analysis of Companies House data.

Official figures show that there has been a 10% decline in company formations in the past year - 589,008 new businesses were launched in 2017, down from 657,790 in 2016.

The Centre for Entrepreneurs (CFE) says that the drop is "mostly a result of the Government's clampdown on 'disguised employment' among public sector workers". The Government changed the rules regarding IR35 employment status in public sector work in April 2017.

The Centre for Entrepreneurs has found that there were 30,000 fewer companies registered by known contractor accounting providers in 2017 compared to 2016.

"This is a welcome re-adjustment to business formation figures, which have become increasingly distorted over the past few years by the rise in contractor accounting firms," said Matt Smith, director of the Centre for Entrepreneurs. "The company formation statistics now give far more accurate insight into the state of entrepreneurship nationwide."

The CFE's analysis of regional trends has found that areas with significant contractor activity have seen the biggest drop in company formations. It reveals that the clearest impact has been seen in Wiltshire where the number of new business dropped from 10,164 in 2016 to just 3,409 in 2017.

Of the new companies registered in Wiltshire in 2016, 7,475 (73%) were registered to an accounting firm that provides payroll solutions to contractors. In 2017, only 458 were registered to the same address.

Similar drops have been found in Wellingborough, Lichfield, East Hertfordshire, Bolsover and Central Bedfordshire - all areas where contractor accounting firms have significantly outnumbered what the CFE calls "genuine entrepreneurial business formations".

"With business registrations increasing for nearly a decade it is not surprising to see the record streak come to an end," said Smith. "While the tax clampdown is responsible for most of the drop, there is evidence that formations have fallen more than expected. To boost start-up figures, the Government must return to championing entrepreneurship and supporting entrepreneurs."

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