IR35 reforms, potential tax rises and economic problems see rise in contractors closing their businesses

Looming IR35 reforms in the private sector, along with the economic climate created by the Coronavirus pandemic triggered an increase in the number of UK limited company directors closing their viable businesses in the three months to September 2020, specialists have said.

Data from The Gazette, the UK’s official public record, showed that 3,126 businesses had voluntarily appointed liquidators in the third quarter of 2020 – up by more than half (52%) in the same period in 2019.

Experts have attributed the surge to the upcoming IR35 reforms, potential tax rises and ongoing economic uncertainty.

Not the first time IR35 reforms see contractors closing down

Reform to the off-payroll rules are due to come into effect in the private sector on 6 April, after being delayed by one year because of the Coronavirus pandemic. IR35 changes will shift the responsibility of determining a contractor’s employment status for tax purposes to the end-client, with the risk to be transferred to the fee-payer in the supply chain. 

John Bell, Director and Founder of licensed insolvency practitioners Clarke Bell, said his firm has seen a rise in the number of inquiries from people interested in closing their business because of IR35. He also said this is not the first time either.

He told Contractor Weekly: “When the government announced its intention to introduce the off-payroll legislation into the public sector in April 2017, we saw an increase in the number of voluntary liquidations amongst contractors in Q1 of 2016.  

“When the government decided to impose the same tax rules on the private sector in April 2020, we also saw an increase in the number of voluntary liquidations amongst the contracting workforce in the months leading up to April [before] the Chancellor pressed the pause button.”

Self-employed sector in a ‘fragile state’

Responding to the figures, Andy Chamberlain, director of policy at the self-employed trade body IPSE, said: “It is extremely concerning but also not surprising that a record number of company directors closed solvent businesses in the three months to September last year.

“2020 was a devastating year for sole directors of limited companies. Covid undermined incomes and security across the sector and directors found themselves entirely excluded from government grants. Now, in this fragile state, the sector faces the disastrous changes to IR35 due to come into force in April.

“We have persistently called for the government to rethink these changes. With the country sinking deeper into yet more disruptive lockdowns, it must at the very least delay the changes to IR35 and preferably scrap them altogether. If it does not, we may well see yet more record lows among limited company directors.”

IR35 reform is manageable

While these figures are concerning, Qdos CEO Seb Maley was quick to express that IR35 reform does not mean contractors need to close their businesses:

“Reports of blanket IR35 determinations may make the headlines – and rightly so – but it doesn’t portray the whole picture. Behind the scenes, thousands of businesses are readying themselves to make fair and compliant IR35 status decisions by April. 

“The changes, while needless and totally short-sighted, can in fact be managed. Speaking from experience, we’ve noticed a big uptake in the number of firms ready to compliantly engage contractors outside IR35 going forward. 

“In the coming months, I expect even more businesses to approach IR35 reforms in the right way.”