Contractor numbers decline as IR35 rules take their toll

Employers more likely to offer permanent roles, says survey – but new tax regulations for private firms may change the market again

The IR35 rules in the public sector may have led to the number of vacancies for contractors and short-term assignments falling by 10 per cent in October, according to new figures from the Association of Professional Staffing Companies (APSCO).

The demand for contractors has declined across each of the sectors surveyed, with particular drops in the IT sector – which suffered a decrease of 10 per cent, and a 30 per cent drop year on year – and the finance and marketing sectors, which saw their contractor bases fall by 15 and 25 per cent respectively over the month.

The overall number of contractors working on assignments also declined by 8 per cent, which APSCO attributed primarily to the IT sector.

“The overall fall in contract placements can largely be attributed to a 30 per cent drop in IT assignments,” Ann Swain, chief executive of APSCO, said. “This may, in part, be in response to changes to rules around off-payroll working in the public sector, which were introduced in April. However, news that the government will not automatically extend these reforms to the private sector without careful consideration should ensure the wider contract market remains strong in the near future.”

Following the introduction of the IR35 rules to the public sector, employers must determine employment status and ensure anyone not entitled to self-employed status is paid via PAYE. With total pay often cut as a result, many contractors resorted to boycotting work opportunities, demanding pay rises for their services or taking early retirement in the aftermath of the changes, People Management has previously reported.

HR teams have been warned to expect significant upheavals in their management of freelance and contractor workers in the coming year, after chancellor Philip Hammond announced a consultation on extending IR35 tax legislation beyond the public sector in last week’s autumn budget.

Businesses may have responded to the IR35 by increasing the number of permanent roles on offer, APSCO suggested. It saw permanent placements jump 5 per cent across the businesses it surveyed.

However, the rise in permanent positions could be bad news for the flexible market, chief executive of The Freelancer & Contractors Services Association Julia Kermode told People Management.

"In skills-short markets, notably those being further impacted by the ongoing loss of non-UK nationals from the UK workforce, our own analysis of UK-wide job ads shows a rising proportion offering more secure, long-term opportunities than perhaps they have in the past. So the increase in permanent roles is likely down to employers needing to attract skills and talent, and offering more long-term opportunities can be a way to do that, particularly if that workforce is otherwise at risk of leaving the UK,” she said.  

“In the public sector, where the new IR35 protocols seek to tax contingent workers as if they are employees without giving them the associated 84 employment rights and benefits, we are aware of increasing pressure from workers to secure those rights through permanent employment.

“Many contractors have been wrongly classified as disguised employees, while some public sector services have issued blanket bans on using contractors. In both scenarios, the new protocols have increased the total cost of labour to the employer, while in the latter scenario the new protocols have diminished the employer's access to flexible resources.”

This year has proved chaotic for employment status, with ongoing battles over the status of freelance and gig economy workers at companies including Uber and Deliveroo, as well as the ongoing uncertainty over how Brexit will affect the employment status of migrant workers based in the UK.

“As we face uncertain times, neither increased cost nor decreased flexibility are helpful to employers,” Kermode said. “With Brexit on the horizon, arguably we would expect to see a consistent growth in contracting numbers as more and more businesses, both in the public and private sectors, turn to the flexible workforce. In times of economic uncertainty, the flexible workforce is more critical than ever, and if immigration rules tighten up I would expect to see demand for contractors rising.”