Contractor confidence took a historical wobble on the eve of IR35 reform

‘The economy might prosper but our independent, freelance business most definitely won’t.’

Such is the latest message from the UK’s contractors operating as limited companies, mainly because of IR35 reform.

Sounded to the Association of Independent Professionals and the Self-Employed (IPSE), the message represents a historical first.

In fact, not since the contractor group began its confidence index seven years ago have contractors expressed more faith in the economy than in their own companies.

'Less confident'

Put another way, it is the first time since 2014 that limited company workers are more gloomy about their own professional prospects than the prospects for the economy.

Fifty-one per cent are “less confident” about their own business over the next 12 months, compared with only 38 per cent who are “less confident” about the economy.

Fifty-five per cent said the opposite -- that they are more confident about the UK’s performance, versus not even one in three who could say the same for their own PSC.

The pessimism about contracting coinciding with the optimism about the economy is mirrored in the short-term too, according to IPSE’s three-month reading of its members.

'Worries about the IR35 changes'

Notably, their economic quarter outlook is up to -4.3 (versus -27.8 in Q4 2020), just as their business quarter outlook has worsened, from -11.9 to -13.9.

The association said that with the “successful” covid-19 vaccination roll-out and the underway roadmap out of restrictions, contractor confidence might have picked up.

But “worries about the changes to IR35” clearly took their toll on the outlook of members and, for the first time, on all three categories of contractor, IPSE said, explaining:

'Growing questions'

“Previously, in Q4 2020, only…professional freelancers had cited government regulation relating to hiring freelancers in the top three factors adversely affecting their business performance and now rank this factor as second in Q1 2021.

“The fact that we now see…managerial freelancers citing this as the top factor, with 82.9 per cent agreeing, shows that the...question of how to continue securing contracts ‘outside IR35’ [is] growing”.

The potentially taxing off-payroll rules of April 6th 2021 also could be behind contractors, as a whole, expecting a hefty 6.2% decrease in their pay rate over the next six months.

'Negative expected pay rate changes'

And although 39% were found to still predict some level of rate uplift, contractors’ capacity to earn more elsewhere is down (for the third quarter in a row), just as 67% of them expect their costs to increase.

But it is the bleaker pay prospects which appear to characterise the tightening situation PSCs faced in Q1.

“The [managerial] and [professional] freelancers' concerns about the IR35 reforms and their impact on the hiring market may explain the negative expected change in their day rates,” IPSE said.

“This is because both…groups predict greater competition and thus lower day rates as ‘outside’ IR35 status contracts diminish in availability. In fact, professional freelancers were predicting the worst drop, with an expected decrease of -12.0 per cent over the next 12 months, while managerial freelancers expected a drop of 8.0 per cent.”

The one bright spot seems to be the third contractor category --  associate professional and technical freelancers, who reported “a positive expected [rate] change of 0.2 per cent.”

'The IR35-unaffected are increasingly confident'

Despite being only miniscule, the predicted uplift is not the only indicator among technical and associate professional-level contractors that they feel more upbeat.

These contract professionals exhibited the highest level of confidence in the economy, in terms of both the 3-month outlook -- up from -27.8 to -4.3, representing the strongest reading since 2015, and the 12-month outlook -- up from -26.5 to +6.7, representing the strongest reading since 2014.

The association put these workers’ increasing confidence down to covid progress (more vaccinations, fewer restrictions), and pointed out that such technical and associate-level freelancers tended to be sole traders and “thus not affected by the IR35 changes.”