IR35 Impacts Startups in 2017 Shows Research

New research suggests IR35 reform is impacting startup numbers

The latest Companies House data revealed a 10.5% drop in the number of UK business formations in 2017 – a decline which a leading think tank has attributed to the arrival of public sector IR35 reform last year.

In 2017, 589,008 companies were formed in the UK, marking a 68,782 decrease compared to the 657,790 new businesses started in 2016. After an in-depth analysis, CFE – the Centre for Entrepreneurs – firmly believes this is mostly as a result of the Government’s ongoing clampdown against disguised employment in the public sector.

A breakdown of the figures into UK postcodes gives a clearer indication that the notable decrease in individuals starting their own business in 2017 can be put down to changes made to the IR35 legislation.

The county of Wiltshire saw 10,164 new businesses registered in 2016, 7,475 (or 73%) of which were registered to an accounting firm providing payroll solutions to contractors. In 2017, only 3,409 businesses were started in the county, with just 458 using this accountancy.  

Of course, fluctuations in any company’s performance – including this particular accountancy – are natural. But a 93% drop suggests there are greater forces at work, and ones which could well be down to last year’s controversial public sector IR35 changes.

Wiltshire isn’t alone in feeling the after effects of reform to the off payroll working rules either. Similar drops (which in some cases reached 70%) in the number of contractors registered to contractor accountancies were recorded in Wellingborough, Lichfield, East Hertfordshire, Bolsover and Central Bedfordshire.

To make matters worse, in each of these areas contractor accounting firms have significantly outnumbered typical startups in recent years.

In total, CFE found a telling 30,000 fewer companies registered by trusted contractor accountancies in 2017 compared to 2016 – a clear indication of the damage done to contracting in these postcodes in the recent aftermath of IR35 reform.

Following record breaking growth in business formations and then such fundamental changes to the way IR35 assessments are carried out in the public sector, Matt Smith, CFE Director, did expect repercussions to some extent.

“With business registrations increasing for nearly a decade, it is not surprising to see the record streak come to an end. While the tax clampdown (IR35) is responsible for most of the drop, there is evidence that formations have fallen more than expected.”

This is CFE’s fourth annual analysis of Companies House’s business formation figures, in which they focus on 200 UK postcodes with large numbers of business formations.

With a substantial sample size of 101,000 business formations, the Centre believes the clear drop in the number of individuals choosing to work independently because of public sector IR35 reform is a trend that carries right across the entire UK – and not only in contractors working through accountancies either. According to CFE, the Government’s tax clampdown is likely to have affected contractors registered to home addresses and offices nationwide too.

Given that recent changes handed end engagers the responsibility and in turn IR35 liability when setting a contractor’s status, public sector bodies and recruitment agencies have also felt the full force of reform. After all, in many cases these end engagers simply aren’t experienced in or have the resources to make accurate IR35 decisions on scale.

Should similar changes be rolled out to the private sector in time, potentially 5.7m companies will need to be acutely aware of the implications that setting an incorrect status could bring, following an IR35 investigation.

In addition to IR35, business rate rises along with a number of other legislation changes, which include incoming cuts to tax free dividend allowance, could have also contributed to the decline in the number of individuals going it alone.

While each of these issues in their own right impacts contractors, of real concern to the independent workforce is the low level of support this Government shows them. And it is the lack of incentives from Theresa May and her Cabinet to start a business which is something that must be addressed sooner rather than later.

“To boost startup figures, the Government must return to championing entrepreneurship and supporting entrepreneurs, as it did so well under David Cameron,” Matt Smith argued.