Business development · 30 January 2018

Government tax clampdown drives decline in startup formations

business insolvencies
IR35 legislation was designed to prevent public sector works from abusing the tax system

A government clampdown on “disguised employment” in the public sector was the dominant contributor to a 10.5 per cent fall in startup formations in 2017, according to new analysis.

Fresh data from Companies House, 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 CFE, the decline can chiefly be attributed to the government’s clampdown on “disguised employment” among public sector workers.

In April 2017, reforms to IR35 legislation were introduced to tackle tax avoidance by freelancers and contractors working in the public sector. HMRC was concerned that contractors were abusing the “corporate” structure of agencies by resigning from their jobs, and returning soon after as a contracted worker with favourable tax and NIC rates.

Read more: What is IR35 and how does it affect you as a business owner?

Breaking down the data, CFE found that IR35 had its greatest impact in Wiltshire, where 7,475 new businesses were registered to an accounting firm that provides payroll solutions to contractors in 2016. After IR35 reforms in 2017, just 458 new firms were registered to this address.

New business registrations also fell in areas where contractor accounting firms had outnumbered other ventures in recent years, such as Wellingborough, Lichfield and East Hertfordshire.

CFE’s interactive map demonstrates a national overview of startup formations in 2017 

Commenting on the findings, Matt Smith, CFE director, said the data represented a “welcome re-adjustment” to business formation figures, which had been “distorted” by contractor accounting firms outnumbering traditional startups.

“The company formation statistics now give far more accurate insight into the state of entrepreneurship nationwide,” Smith added.

However, a generally muted encouragement of entrepreneurship by government was also attributed to the drop in new business registrations.

CFE claimed a cumulative impact of business rates revaluation and other regulatory burdens had discouraged individuals from pursuing business ideas.

“With business registrations increasing for nearly a decade it is not surprising to see the record streak come to an end” Smith noted.

“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.”

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ABOUT THE EXPERT

Simon Caldwell is a reporter for Business Advice. He has a BA in politics and communications from the University of Liverpool, and has previously worked as a content editor in local government and the ecommerce industry.

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