Change to IR35 triggers 30,000 slump in start-ups

Changes to IR35 which the government were warned not to make have been traced by a respected thinktank as the main cause of business formations falling for the first time in seven years.

Having used Companies House’ data, the Centre for Entrepreneurs found that start-ups plummeting from 657,790 in 2016 to just 589,000 last year was largely due to the April 2017 framework.

The clearest impact of the “disguised employment clampdown,” which is currently confined to the public sector but is to be consulted on for the private sector, is found in Wiltshire, the centre said.

In particular, 2016 saw 10,164 new businesses registered in the county, with 7,475 of these registered to an accounting firm that provides payroll solutions to contractors.

In 2017 however, only 3,409 new businesses were registered in Wiltshire, 458 of which were registered to the same accounting firm’s address.

Similar drops -- in some cases over 70% -- can be found in Wellingborough, Lichfield, East Hertfordshire, Bolsover and Central Bedfordshire.

Overall, and underlining the sheer scale of the April changes, the centre found 30,000 fewer companies registered by contractor accounting providers in 2017 compared to 2016.

While businesses registered in homes, offices and local accountancy firms constitute about 515,000 of the 589,000 new start-ups, about 60,000 founders used company formation agents, business centres or virtual offices. This represents a 20% increase on 2016..

Meanwhile, away from areas highly impacted by the April 2017 tightening of IR35, local authorities across Britain still saw a slight drop (7.3%) in business formations last year.

The reason given was two-fold. Firstly, because the clampdown is bound to have hit contractor accountants nationwide and secondly, because of a ‘cumulative effect’ -- business rates combining with other regulatory burdens.

But Brexit isn’t to blame, because there was no slowdown in company formations observed in the final six months of 2016, “so it is unlikely to have directly impacted on formations in 2017.”

“With business registrations increasing for nearly a decade it is not surprising to see the record streak come to an end,” added the Centre for Entrepreneurs’ director Matt 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”.

The recommendation comes after the Association of Independent Professionals and the Self-Employed described the government's IR35 policy in the public sector as "out of touch with the way people want to work."

"The government says the public sector rules do not effect genuinely self-employed people – but this is wrong," said Imogen Farhan, the association's policy officer.

"Because public authorities are now responsible for determining status, and liable for incorrect determinations, they are applying IR35 to all engagements, for fear of being hit with a big tax bill further down the line.

"Many of the people unfairly affected by this disastrous legislation, are...highly paid, highly skilled, autonomous workers – exactly the sort of work the government should be supporting."

Yesterday, financial and IT recruiter Morgan McKinley reported its highest increase of contractors leaving their independent businesses to become permanent staff for three years, due to the "changes to IR35 [and the] off-payroll rules."