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Looming threat of Covid-19 and IR35 reform conspire to keep contractor confidence dampened

Quarterly data on how confident freelancers feel about their job and earning prospects highlights the negative impact Covid-19 and the government's looming tax reforms are having on the sector

The freelancer community has confessed to feeling fearful about their economic prospects over the next 12 months, because of concerns about the incoming IR35 tax reforms and the threat of a second wave of Covid-19 infections.

That is according to data gathered from 748 contractors by the Association of Independent Professionals and the Self-Employed (IPSE), in conjunction with PeoplePerHour, as part of its latest Freelancer confidence index report.

This quarter’s report, which covers the March to June period, highlights the toll the UK government’s coronavirus lockdown had on the freelance community’s ability to find work, as well as the impact it had on their pay rates.

It showed that he average income of freelance workers dropped by 25% over the period, with those surveyed reporting a downturn of about 3% in their average day rate.

This, in turn, led to the average quarterly earnings reported by freelancers dropping from £20,821 in the first quarter of 2020 to £15,709 in the second quarter.

The data also shows that the average freelancer spent five and half weeks out of work during this 13-week period, which the Index describes as a “historic increase” in the amount of spare capacity for work that contractors have.

As a result, freelancers remain downbeat about their economic prospects over the coming months, with the Index showing that freelancers’ confidence remains in short supply after hitting a record low during the first quarter.

“With this stark drop in income, freelancers are understandably pessimistic about their business performance over the next three months,” said IPSE in its accompanying report.

“Although this measure increased somewhat from the record low of -62.6 last quarter, at -20.4 it is still the second-lowest score since the Confidence index began in 2014.”

These pessimistic feelings look set to persist over the coming quarters, IPSE’s data suggests, with concerns over a second wave of coronavirus infections and renewed lockdown measures looming large.

At the same time, apprehension about how the roll-out of the IR35 reforms in the private sector will affect their employment prospects remains a top-of-mind concern for freelancers, said IPSE.

On this point, 61% of freelancers said they expect to see their day rates continue to fall over the next 12 months, with many predicting an average drop of 11%.

“Freelancers are even more pessimistic about the performance of their business over the next 12 months,” says the IPSE report. “This [confidence] score also increased from the lowest on record to the second-lowest on record: from -57.3 to -30.5.

“The score may be lower due to fears of a second wave and renewed lockdown later in the year, as well as freelancers’ concerns about the changes to IR35 that are due to take effect in April next year.

“Accordingly, freelancers cited the coronavirus pandemic and the resultant state of the UK economy as the two factors doing most harm to their businesses, closely followed by government tax policy relating to freelancing.”

Read more about IR35 and the impact on contractors

Inna Yordanova, senior researcher at IPSE, said this quarter’s Confidence index confirms just how hard-hit the freelance community has been by the economic fallout from Covid-19, particularly limited company contractors, who have found themselves unable to access the full gamut of financial support measures put forward by the government to support businesses through the pandemic.

“Almost two-thirds of the highly skilled freelancers covered by our Confidence index work through limited companies and therefore could not get support through the government’s Self-Employment Income Support Scheme,” said Yordanova.

“With such a financial cliff-edge and limited government support, it is not surprising freelancers’ confidence in their businesses over the next 12 months is drastically low – or that so many are leaving self-employment. Recent ONS data shows a drop of 178,000 freelancers since the last quarter.”

Yordanova said this is concerning, considering the vital role that freelancers have previously played in the process of post-recession economic recovery.

“If they are to play this crucial role, however, the government must make sure that in the event of a second wave, all freelancers have the support they need,” she added. “Otherwise, going through another full lockdown and the resultant slump in work and income could be utterly devastating for them.”

On this point, Xenios Thrasyvoulou, founder and CEO of PeoplePerHour, said freelancers remain in a good position to pick up work in the coming months, particularly those with capacity to work remotely.

“More businesses are turning towards low-risk strategies, which leads favourably towards the on-demand nature of freelance work,” he said. “If we’re able to suppress a second wave, we hope to see an increase in freelancer confidence over the next quarter.”

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