Why intervening ministers can’t seem to let contractors be

In just eight years, successive governments have radically reshaped the way self-employed professionals operate in the UK. With further reforms targeting the umbrella sector on the horizon, it's increasingly difficult to predict where this will all end, writes Joshua Toovey, senior research and policy officer at IPSE.

Limited companies fell out of favour and are still falling

Although HMRC stops short of saying it outright, it's reasonably clear that Personal Service Companies (single-person incorporated businesses to you and me) are viewed by the tax authority as a means of avoiding employment-related tax obligations.

It's a misguided attitude that was most clearly demonstrated with the IR35 reforms of 2017 and 2021, which triggered a significant decline in the number of contractors working through their own limited companies.

The OPW ordeal (is ongoing)

This was due to the reforms (the Off-Payroll Working rules) resulting in risk-averse end-clients, wary of potential HMRC scrutiny, responding with blanket bans and ultimately refusing to engage limited company contractors at all.

Unsurprisingly, outside IR35 engagements became more scarce, and contractors had to look elsewhere to earn a living.

Even HMRC’s own research reflects the impact.

It says 45,000 fewer limited companies were formed around the time of the 2021 reforms than would have been expected.

IR35-induced talent exodus

Our research corroborates this, revealing that many freelance professionals reluctantly deserted the contracting sector, despite still having much to offer the contracting market.

Ultimately, IR35 reform changed how the self-employed could work, with many moving away from their limited companies altogether.

And the changes didn’t stop there.

The rise of umbrella companies

One of the consequences of the OPW rules has been the sharp increase in contractors working through umbrella companies. Today, nearly three in ten contractors operate under such arrangements.

IPSE members who now find themselves in umbrella companies tell us they would prefer the independence and business-to-business relationship that comes with running their own company.

Who’s terms? Not yours; an umbrella’s…

The umbrella serves a purpose, insofar as it enables contractors to continue working on projects.

But contractors would rather be doing so on their own terms.

Instead, many once bonafide freelancers find themselves in a quasi-employment model -- treated like employees in some ways, but without the benefits that usually come with employment, such as career progression and job security.

The verdict we’re forced to on umbrella companies

Compliant umbrella companies will provide statutory employment rights to their employees, and for some workers, the model is convenient and satisfactory.

But we must honest. We feel that it’s not the kind of employer / employee relationship most would recognise as truly benefiting the worker. Umbrella companies rarely concern themselves with the actual work being delivered or the wellbeing of the worker. Nor do they typically offer the kind of benefits one might expect from a ‘good’ employer such as training or development opportunities.

The role of an umbrella is largely transactional: facilitate payroll and take a cut for doing so. For most contractors, it’s a poor substitute for true autonomy.

Action on umbrella companies is long overdue

And then there is the non-compliant end of the umbrella company market.

After effectively funnelling tens of thousands of contractors into umbrella arrangements, the government has now taken issue with some of the dubious practices seen in the brolly sector.

While newfound tax scrutiny is welcome and overdue -- particularly given that many avoidance schemes now involve non-compliant umbrella models -- it does further demonstrate the ill-thought-through nature of the IR35 changes in the first place.

Moving umbrella employee PAYE to agencies: the unknowns

The government’s plan from HMRC to move liability for PAYE deductions from umbrellas to the agency will likely have a significant impact on contractors.

However, there is still uncertainty over exactly what the impact of shifting PAYE in this manner will be, precisely.

We may see an increase in agencies administering the payroll themselves.

We may see contractor recruitment agencies only choose to work with those umbrella providers they can trust.

We may even see the end of umbrellas altogether.

Whatever the outcome, it's yet another shake-up for contractors already weary of politicians who don’t seem to understand the sector.

And it’s contractors who continue to bear the brunt of ill-conceived policy interventions.

Stop the legislative merry-go-round; I want to get off

Our organisation understands that contractors are fed up with the seemingly never-ending merry-go-round that is the government intervening in their supply chain.

We believe there is a real appetite to return to a simpler time, where genuine contractors could easily prove their IR35 status and concentrate on working through their own limited company.

Could a Freelancer Limited Company offer a way forward?

That’s why we continue to champion our Freelancer Limited Company (FLC) model, developed in collaboration with EY. This structure would allow genuine one-person businesses to operate under a recognised, compliant framework -- removing the need for repeated employment status assessments.

Clients would engage these professionals with clarity and confidence, knowing the arrangement sits outside IR35.

With the government looking to introduce ‘single worker status’ by the end of this parliament, we believe that reforming employment status must be a central part of that effort.

Let’s not leave it all up to officials

The FLC model is a practical, forward-thinking proposal -- and we’ll be making the case for it at every opportunity in our conversations with them, because their own interventions have left a lot to be desired.