Contractor sector falls into recession, as covid-19 bites, 'substantially'

The first measure of freelancer confidence during the heart of coronavirus has found that not even the flexibility of limited company contracting could withstand the pandemic.

In fact, the average contractor suffered a downtime or ‘on the bench’ period of almost 50%, as they were deprived of work for five-and-a-half weeks out of 13, due to covid-19 impacts.

Other findings also show how the virus and the lockdown have hit freelancers (their business and fiscal outlook is the second bleakest ever), but loss of work is “the real change”.

'Largest ever spare capacity jump'

The Association of Independent Professionals and the Self-Employed, which is behind the Q2 index also said: “Each [contractor] group is working at least two weeks less per quarter.

“This is by far the largest ever jump in spare capacity, with ‘SOC1’ [contractors, such as managers and directors], working two-and-a-half weeks less.

“This is the key metric behind [a] 25 per cent drop in average earnings for all three groups.”

'The great decline'

In average day rate terms, the drop is not that noticeable (down by three per cent), especially not for technical contractors (up by £1), and professional contractors (up by four per cent).

But contractors who work as managers, directors and senior officials suffered a 15% rate drop (from £584 to £498), and were on the bench most (49% of the quarter, so 6.3 weeks).

“The great decline in capacity utilisation alongside a slight fall in day rates led to [the] large 25% drop in quarterly earnings, from £20,821 in Q1 2020 to £15,709 in Q2 2020,” IPSE said.

'Recession'

“This marks the lowest level of quarterly [contractor] earnings recorded…since 2014 when [our] surveys began.

“It also marks a second consecutive quarter of negative growth in freelancers’ earnings, bringing the sector into recession.”

At PeopleperHour.com, which co-authors the index, founder Xenios Thrasyvoulou said the government should have seen it coming that the contractor sector would fall into the red.

'Unsurprising'

“Unfortunately, it is no surprise to see that freelancers’ earnings fell significantly during the last quarter.

“When the government announced their support package for self-employed workers, we made it clear that many full-time freelancers would struggle…to receive the relevant benefits. This has undoubtedly led to a large drop-off in income for many who have lost clients during the pandemic.”

“This recession is unprecedented,” reflected IPSE’s economic policy adviser Ryan Barnett.

“Since it is unusual and actually sanctioned to stop something else [-- the covid-19 pandemic], economists, politicians and therefore freelancers, only have limited information about where we might be in several months’ [time].”

'Other negatives not gone away'

Invited in the index to have their own say about coronavirus, 81 per cent of contractors identified the pandemic as the “top negative influence” on their business.

Unanimous across all three of the occupational groups of freelancers, the reading is “hardly surprising,” IPSE said, but does mean “other negative factors affecting freelancers’ businesses have not gone away.”

For example, three in five freelancers still pointed the finger at ‘government tax policy,’ indicating that despite being deferred to April 2021 due to covid-19, reform of IR35 remains a significant impediment.

'Substantially'

In the run-up to the reform’s originally intended commencement date (April 2020), many engagers banned limited company work outright, denying PSCs of any work whatsoever.

One worrying subtext of the report is that if such removals of work because of IR35 reform reoccur, contract jobs for PSCs could become rarer still, especially as covid is already narrowing the pipeline.

In fact, according to the Q2 report, 69% of contractors said demand for their services had been bitten by covid; 53% said it had been bitten “substantially” and 60% said it had lost them a client.

'Second wave'

“Freelancers are more worried about the prospects for the coming year than the next three months,” says IPSE’s senior researcher Inna Yordanova.

“Perhaps [this is] reflecting fears about a second wave [of coronavirus] as well as the implementation of the changes to IR35 in April next year.”

She added that almost two-thirds of the highly skilled freelancers polled for the index (who work through their own limited company) “could not get support” via the SEISS.

'Cliff-edge'

“With such a financial cliff-edge and limited government support,” she said, seeming to refer to the CJRS covering just the salary of PSC directors, “it is not surprising freelancers’ confidence in their businesses over the next 12 months is drastically low”.

The association appealed: “The government must make sure that in the event of a second wave, all freelancers have the support they need. Otherwise, going through another full lockdown and the resultant slump in work and income could be utterly devastating for them.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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