IR35 reform ‘bedding in’ sent contractor confidence into the red

IR35 reform drove contractors’ economic confidence into the red between July and September 2021.

The decrease in faith in the economy from contractors’ perspective sent their UK outlook into negative territory for the first time since the new off-payroll rules were introduced.

In fact, dropping to --2.4, from 8.2 in January-March, the score “represents the first” measurement of the April rules “bedding in,” said IPSE which tracks contractor attitudes quarterly.   

'Less confident'

The confidence drop showed up in the freelancers’ own businesses too, with the main three types of contractor admitting to less faith in their own ventures’ prospects.

Managers were the only contractors whose confidence avoided negative territory but, overall, both freelancers’ commercial outlook and their fiscal outlook returned to the doldrums.

In fact, 49% of freelancers were “less confident” in the UK economy for the next 12 months, the Q3 index shows, and 40% were “less confident” in their venture for the same period.  

'Tax policy, regulation to blame'

As to the cause, it looks indisputable.

Asked about the key constraint on their business, a hefty 70% blamed “government tax policy relating to freelancing,” and 64% blamed “regulation on hiring freelancers.”

While the accusatory finger towards government (and the confidence drop) seems more acute for immediately following signs of optimism in Q2, caused by a then-lift in covid restrictions, the IR35 shadow seems much longer-lasting. 

'IR35 is a key concern that's set to continue'

Yesterday, IPSE’s Andy Chamberlain explained to ContractorUK: “The spike in concern in IR35 demonstrates the impact of the reforms on the sector and the momentary fall in covid cases last year.

“The recent spread of the Omicron variant might cause the pandemic to once again overtake IR35 next quarter [as an impediment to contractors]. We shall see. But the reforms remain a key concern and we expect that to continue for some time to come.”

Potentially highlighting the reform’s longtail, three-quarters of contractors said their costs would rise in the next 12 months – by a massive 12.4%, on average. And they forecast only a tiny 1.9% rate rise to offset it for the entire period.

'Thousands of contractors forced out of business'

To Mr Chamberlian, it all smacks of a financial burden that hit contractors in the reform’s run-up (as risk-averse engagers pre-empted the rules), and which still weighs on many today.

“Thousands of contractors have been forced out of business and onto to a payroll as a result of the IR35 changes.

“Once on the payroll, typically of an umbrella company, they are often expected to pick up the employer NI bill and the Apprenticeship Levy -- in addition to employee NI and tax.”

Head of policy at IPSE, he summed up: “The reforms effectively shunt all the employer costs down onto the contractor.”

'Burning sense of injustice'

According to the index, contractor stress returned in Q3 to levels last seen at the height of the pandemic, at an average of 5.87, where 10.0 is extremely stressed and 0.0 is no stress at all.

Again, IR35 is in the mix or the cause. “The burning sense of injustice [of the April rules for bonafide contractors] is compounded in those cases where they fundamentally disagree with their client’s determination, but cannot meaningfully challenge it,” said Mr Chamberlian, in line with concerns voiced by Tory peer Lord Butler.

IPSE’s policy director added: “More egregious still, are those instances where clients have not even attempted to assess their [contractors’ IR35] status, and instead insisted on all payments being made via payroll – a blanket ban on contractors. The spike in IR35 concern [in Q3], therefore, reflects the ongoing damage that the legislation is having on the once vibrant sector.”