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IPSE: More than a third of freelancers have quit contracting since IR35 reforms

Exodus, movement of the people... to the Middle East or elsewhere

More than a third (35 per cent) of contractors in the UK have become permanent employees, retired, shifted to work overseas or are "simply not working" since IR35 tax legislation was revised earlier this year.

This is according to the Association of Independent Professionals (IPSE) which found 35 per cent fewer freelancers among those it surveyed since 6 April when the government pushed through the delayed reform.

"This research shows the devastating impact the changes to IR35 have had on contractors, needlessly compounding the financial damage of the pandemic," said Andy Chamberlain, director of policy at IPSE. "Now, just when contractors are needed the most - amid mounting labour shortages across the UK and particularly in haulage - government decisions have drive out a third of the sector."

The Register asked IPSE how many technology professionals were included in the survey but we've yet to receive a reply.

In March, the Learning & Work Institute warned the UK is heading into a "catastrophic" digital skills shortage, with the number of young adults sitting IT subjects at GCSE (the exam kids in the UK take at 16, prior to the last two years of secondary/high school) dropping 40 per cent since 2015.

An ex-contractor that spoke to us said the figures sounded "light" and that freelancers are "like me, quitting contracting every day out heading to the Middle East."

What is IR35?

IR35 is a tax reform that was unveiled in 1999 by the UK tax authorities. The latest regulation change – which came into force in April 2021 – forces medium and large businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves.

Contractors found to be within the scope of the legislation – ie, inside IR35 – will have to pay more tax than they might expect.

The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.

The measure came into effect in the public sector in 2017. The British government hoped the reforms would recoup £440m by bringing 20,000 contractors in line.

HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023.

IPSE also found that 36 per cent of those it polled are working through employment deemed inside IR35, with four in five of those saying they'd seen a drop in quarterly earnings by an average of 30 per cent. Some permanent staffers among The Reg readership might not have much sympathy for the generally highly paid contractors, judging by past comments.

Some 38 per cent of the contractors IPSE polled said their clients had yet to give them a Status Determination Statement, as required under IR35. One in five said clients has blanket-assessed all contractors as being inside IR35.

"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," said Chamberlain.

"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.

Chamberlain described the situation as a "mess", adding: "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."

Around 34 per cent of those it polled now work via unregulated umbrella companies: one in four said they were dissatisfied with those businesses and 46 per cent said they are happy with them.

Campaign groups have called for umbrella companies to be regulated, and has bowed to pressure to police the sector.

IPSE's figure didn't necessarily ring true for everyone. Dave Chaplin, CEO of IR35 Shield, which develops tools that it says help contractors manage compliance, 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 bottoming out of the market, and that it is starting to grow again.

"Many firms choose what they may have considered [to be] 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.

"For firms with large numbers of contractors, from a practical perspective they concluded they needed to press the 'IR35 reset' button and ban PSCs in the short term whilst they got their house in order, and are now ready to hire again, having also implemented a robust process." ®

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