IR35 drives decline in business start-ups for the first time since 2010

Companies House data, examined by The Centre for Entrepreneurs (CFE), showed that 589,008 new businesses were registered in 2017 – a 10.5 per cent drop on the 657,790 founded in 2016.

According to the Office for National Statistics, this is the first time the number of new businesses has fallen since 2010.

New analysis shows that the decline can mainly be attributed to the government’s clampdown on “disguised employment” among public sector workers.

IR35 rules implemented by Theresa May’s government last year is the principal cause of a drop in the number of new businesses starting up in 2017 in comparison to 2016.

Shadow Business Secretary Rebecca Long-Bailey reacted to the study by accusing the May government of ignoring the needs of small businesses. She told The Times newspaper that it’s been clear for some time that the government is failing to properly support entrepreneurs.

The CFE singles out rebooted IR35 rules as a major cause driving the decline. This has affected thousands of micro businesses and personal service companies run by contracting professionals in the public sector since implementation in April last year. Many have been classified as contractor accounting firms that the government believes allow individuals to lower their tax bills unfairly.

Large numbers of these skilled contracting workers are desperately needed by public sector end clients for short-term interventions in crucial projects. They are hired as off-payroll contractors precisely because they are required for time-limited interventions, not for long-term employment in which case they would have been engaged as such.

Many contracting professionals who have seen their incomes reduced by the tax hike have left the public sector altogether – they are forced to pay significantly higher employee income tax while not receiving any of the statutory benefits that the tax pays for (e.g. paid holiday leave, paid sick leave and maternity/paternity leave).

Those who have remained have stopped using their personal service companies and transferred to PAYE umbrella companies instead in order to maintain their flexibility.

CFE Director Matt Smith said that while the tax clampdown is responsible for most of the drop, there is evidence that formations have fallen more than expected. He said the data represented a “welcome re-adjustment” to business formation figures, which had been “distorted” by contractor accounting firms outnumbering traditional start-ups.

“To boost start up figures, the government must return to championing entrepreneurship and supporting entrepreneurs, as it did so well under David Cameron.”