A new study has identified changes to IR35 rules implemented by Theresa May’s government last year as the principal cause of a drop in the number of new businesses starting up in 2017 in comparison to 2016.
The research comes from the Centre for Entrepreneurs think tank (CFE) and reveals that while 657,790 new businesses were launched in 2016, in 2017 the figure fell to 589,008 – a contraction of 13.7%. The report used data from Companies House.
According to the Office for National Statistics, this is the first time the number of new businesses has fallen since 2010. The decrease has occurred amidst complaints from business founders that the atmosphere for launching small enterprises has become notably more unfavourable since Theresa may became Prime Minister.
Shadow Business Secretary Rebecca Long-Bailey responded to the study by accusing the May government of ignoring the needs of small businesses. She told The Times newspaper: “It’s been clear for some time that the government is failing to properly support entrepreneurs. Mishandling of business rates is just one of a number of examples.”
The CFE singles out rebooted IR35 rules as a significant factor driving the decline. This has affected thousands of microbusinesses 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.
This claim has been hotly disputed by most industry experts, as 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 (otherwise they would have been engaged as such).
As a direct result of being forced to pay significantly higher employee income tax despite receiving none of the statutory benefits that the tax pays for (e.g. paid holiday leave, paid sick leave and maternity/paternity leave), many contracting professionals who have seen their incomes slashed by the tax hike have left the public sector altogether. According to data from the Association of Professional Staffing Companies (APSCo), increasing numbers of those who have remained have stopped using their personal service companies and transferred to PAYE umbrella companies instead in order to maintain their flexibility.
Commenting on the findings, CFE Director Matt Smith said: “While the tax clampdown is responsible for most of the drop, there is evidence that formations have fallen more than expected.
“To boost startup figures, the government must return to championing entrepreneurship and supporting entrepreneurs, as it did so well under David Cameron.”