Contractors' confidence sinks under IR35 reform

Confidence among contractors in their single-person’s business performance has plummeted to its lowest level on record, an index shows.

The Association of Independent Professionals and the Self-Employed said such contract professionals now expected the biggest slump in their business since its index began in 2014.

Technical contractors and those at associate professional level are the most pessimistic (--14.3 confidence score), followed by managers/directors/officials (--11.4), followed by those in professional occupations (--10.5), such as IT.

Project contractors felt deflated first

It is mainly the latter type of contractor who Professor Andrew Burke, chairman of the Centre for Research on Self-Employment, says will have first experienced the reasons to feel less optimistic.

“Technology-based freelancers in this survey are in a position to observe the early indicators of a slowing economy, as they are typically contracted on projects involving business growth”.

Managerial and professional freelancers would be in a similar position, he added, if they had worked on innovation, technological change or entrepreneurship projects between April and June.

“They are clearly observing their business clients scaling down plans for firm growth and innovation,” Prof Burke said of the contractors, explaining their downbeat confidence scores.

Government and Brexit to blame

The index’s headline confidence score (--12.2) equates to only 19% of contractors expressing confidence in their business over the next three months mainly because of government policy and Brexit, IPSE said.

Although Britain’s EU exit appears to bother associate professional/technical contractors the least, more than eight in 10 respondents in all three contractor categories blamed their gloomy outlook on the government regulating against them.

“Uncertainty about access to the single market is likely to be a major factor in freelancers’ concerns about Brexit,” IPSE acknowledged. “[But it’s] the changes [to IR35 that] have fuelled much of the[ir] pessimism and uncertainty”.

Status, brand and reputation

The association’s head of research Suneeta Johal tried to see an upside: “The good news is that these negative drivers [Brexit and IR35 reform] are all within the control of the government.”

She added: “If addressed, [that] could and should help alleviate concerns. Successful Brexit negotiations and reassuring freelancers of their tax status would go some way to increasing their waning confidence.”

However, for their part, contractors will use their “brand value/reputation in the market” as the main way -- out of 14 others -- to get ahead over the next three months.

They will also no doubt try to stick to already high ‘on-contract’ levels (83% were always working in Q2), and strong day rates (they peaked in Q2 at an average of £525), despite almost all of them forecasting higher costs.

Fears for the future

“If inflation continues to climb, it will erode earnings right across the sector,” IPSE warned. “[And already] the vast majority -- 92% -- of freelancers are expecting their business costs to rise.”

Another issue that the association will hope is not on the horizon -- an extension of the public sector’s off-payroll rules to the private sector -- could also be clouding its members’ outlook.

It said: “Changes to IR35 legislation in the public sector have begun to bite, with reports of many freelancers walking away from contracts. Any attempts to bring about further changes to freelancers’ tax status could prolong negative sentiment towards the government.”