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Tax dismay

IR35 change forces a third out of self-employment

Freelance worker

Many freelancers have become full-time employees

A third of contractors have left self-employment since the changes to the IR35 tax rules, creating a “mess” that the government must clean up, says a trade body.

The new rules make sure that a contractor, who would have been an employee if they were providing their services directly to the client, pays broadly the same tax and National Insurance contributions as employees.

The change, which is intended to prevent tax avoidance, came into effect in April but was met with dismay by many freelance workers who prefer to manage their own tax affairs.

There were warnings ahead of the change that as many as a half of freelancers would quit self-employment. New research published today by IPSE (the Association of Independent Professionals and the Self-Employed) reveals that many contractors have moved into permanent employment, retired, are working overseas or are simply not working at all.

Its found that of those who remain, more than a third (34%) are now working through unregulated umbrella companies and another third (36%) are working through engagements deemed ‘inside IR35’. 

Working inside IR35 not only leaves contractors essentially in no-rights employment, it also has significant financial consequences, says IPSE.

Four out of five contractors (80%) working inside IR35 said they had seen a drop in their quarterly earnings – by an average of 30%. A quarter even said their income had dropped by more than 40%. 

Andy Chamberlain, director of policy at IPSE, said: “This research shows the devastating impact the changes to IR35 have had on contractors, needlessly compounding the financial damage of the pandemic and the unnecessary gaps in support.

“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.


“There is one word and one word only for this situation: a mess. 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.

“Government must also urgently set out detailed regulations for how umbrella companies should operate and also work to clear the confusion across self-employment by clarifying when it is right for people to operate as sole traders, employees or limited companies.

“We are keen to work with government on this, but, as this research shows, it must take this seriously: it must recognise the mess the changes to IR35 have created and work to get a grip on the situation.”

A significant problem seems to be the implementation of the rule changes by clients. Under the new rules, clients are now required to give contractors a Status Determination Statement (SDS) to confirm their IR35 status, but nearly two out of five (38%) said their clients had not done this. 

One in five (21%) contractors said their clients had also blanket assessed all engagements as inside IR35, while one in ten (11%) said their clients had blanket banned contractors altogether. Another 34% said they were now having to work through unregulated umbrella companies for their clients. 

One in four (23%) of all contractors working through umbrella companies say they are dissatisfied with their umbrella company, compared to 46% who are satisfied.

One key area of concern is business expenses, which most contractors now cannot claim from their umbrella company: 55% were dissatisfied with this.

Another key concern is the cost of Employer’s National Insurance: 33% said they were dissatisfied with this – most likely because many umbrella companies are passing this cost onto contractors through a deduction from their day rate. 

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