Freelancers could help solve UK’s £94bn skills crisis but IR35 is putting a stop to it

A survey by the British Chambers of Commerce (BCC) reveals a worsening recruitment crisis in the UK and IR35 could be at the heart of it

The survey of over 4,700 businesses found that 74% reported recruitment difficulties in Q2 2024, a significant increase from 66% in Q1.

Construction and engineering firms are bearing the brunt of staffing issues, with 82% reporting recruitment problems in Q2, up from 69% in Q1. Some 79% of firms in the transport and logistics sector said they had faced difficulties (up from 69% in Q1). Meanwhile, in production and manufacturing, 77% of businesses trying to recruit faced problems, up from 70% in the previous quarter. 

The core issue is a growing skills shortage and it’s costing the UK economy an estimated £94 billion each year.

“It’s alarming that recruitment difficulties have increased in recent months across all sectors,” said Jane Gratton, Deputy Director Public Policy at the British Chambers of Commerce. “The very sharp rise in the construction industry is particularly worrying,” she said.

“People shortages and labour costs are ramping up pressure on firms and holding back growth.  We need to prioritise help for people to get back into the labour market and remove the barriers to business investment in training,” according to the BCC public policy expert.  

She said, “The new government must work at pace to outline a long-term national skills strategy, working closely with the devolved administrations. 

Gratton suggested building on Local Skills Improvement Plans could help develop strong partnerships between employers, training providers and others – “to ensure people get the skills and support they need.” 

IR35 and the Skills Shortage

The UK’s IR35 legislation, introduced to address tax avoidance by contractors working as disguised employees, has been linked to the country’s skills shortage in several ways:

1. Disincentivising contracting: The complexity and uncertainty surrounding IR35 compliance have deterred many skilled contractors from taking on projects, particularly in the public sector. This has reduced the available talent pool and contributed to skills shortages in sectors like IT and engineering.
2. Push towards employment: IR35 reforms have incentivised some organizations to move away from using contractors altogether, opting instead for full-time employees. While this may address tax concerns, it can exacerbate skills shortages if companies cannot find suitable candidates for permanent positions.
3. Loss of flexibility: The restrictions imposed by IR35 on working practices can make contracting less attractive for those seeking flexibility and autonomy. This could lead skilled professionals to leave the UK for countries with more favourable tax regimes and contracting environments.
4. Increased costs: IR35 compliance often requires additional administrative overhead and legal fees for both organisations and contractors. This can increase project costs and make it more difficult for smaller businesses to access the specialist skills they need hindering their growth and recruitment goals.
5. Negative impact on recruitment: The IR35 reforms have added complexity to the recruitment process, making it more difficult for companies to find and engage contractors quickly and without risk. This can slow down project timelines and further contribute to skills shortages.

While IR35 aims to create a fairer tax system, its implementation has had unintended consequences for the UK’s skills shortage. By disincentivising contracting, reducing flexibility, and increasing costs, the legislation has made it more difficult for businesses to access the specialist skills they need to thrive. This highlights the need for a balanced approach to IR35 that addresses tax concerns without stifling the flexible workforce.

Investment in training: where is it?

Staff and skills shortages are hitting businesses hard, especially in construction, engineering, and transport where over 75% of firms reported recruitment difficulties.

In Q2, 62% of respondents reported they had yet to fill roles with the right skills, up from 56% in Q1.

Despite this, investment in staff training remains stagnant, with only a slight increase in the second quarter. These staffing challenges are driving up labour costs, forcing 67% of businesses to consider raising prices. This pressure is particularly acute in hospitality, construction, and manufacturing.

“The UK economy has a pervasive skills and productivity problem that stretches back long before the pandemic and Brexit, ” said Jane Gratton, Deputy Director Public Policy at the British Chambers of Commerce.

Gratton said skills shortages “ramp up pressure on firms, damaging their ability to operate profitably and leading to unsustainable wage inflation.”

Skills England

“Alarmingly, our research shows that recruitment difficulties have increased in recent months across all sectors. Better planning for skills is crucial,” said Gratton. “We need a stable and coherent national skills strategy that ensures institutions are delivering the training the economy needs and that gives businesses the confidence to invest for the long term,” she said.

The core issue is a growing skills shortage, impacting 62% of businesses, and costing the UK economy an estimated £94 billion annually.

British Chambers of Commerce (BCC)

The Labour government has plans to establish Skills England to bring together businesses, training providers and unions with national and local government to ensure Great Britain has “the highly trained workforce needed to deliver Labour’s Industrial Strategy.”

“Skills England will formally work with the Migration Advisory Committee to make sure training in England accounts for the overall needs of the labour market,” said Labour.

Recommendations for freelancers and contractors:

This growing skills shortage despite its link to IR35 reforms still presents a significant opportunity for freelancers and contractors, particularly in sectors struggling with recruitment, such as construction, engineering, hospitality, and retail.

What’s the point of having specialised skills if you’re not actively showcasing them to attract new clients and projects? Dedicating a few hours each week to networking and sharing insights on professional forums can significantly enhance your visibility and open doors to new opportunities.

You’ve likely heard about the importance of upskilling and reskilling to meet high recruitment demand. Experienced freelancers can play a crucial role in filling the skills gap by initially training staff. By staying ahead of the curve with the latest industry certifications, you can continuously market your services to former clients for future training needs or even lead new projects. This ensures your skills remain relevant and in demand, opening doors to lucrative opportunities.

Don’t forget to market yourself

Even with a robust online presence, neglecting consistent, targeted networking efforts would be a missed opportunity. What’s the point of having specialised skills if you’re not actively showcasing them to attract new clients and projects? Dedicating a few hours each week to networking and sharing insights on professional forums can significantly enhance your visibility and open doors to new opportunities.

You can market your skills and insights at industry events and on LinkedIn. You can always have a catch-up call with recruitment agencies, existing clients or ones you haven’t worked with in a while. Nothing is stopping you from creating opportunities, too. Keep track of company news so you can pitch to clients about how you could help them add value for their customers or staff’s expertise through training.

Lastly, be flexible to short-term contracts alongside project-based work, especially if you are using new skills or adopting your skills to a new industry.

By staying informed about industry recruitment trends and focusing on in-demand skills, you can better position yourself for new opportunities.

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An IPSE survey reveals a troubling trend: highly skilled UK freelancers are out of work due to IR35. The situation looks to have created the ideal environment for American companies to recruit British talent from across the Atlantic. Will politicians wake up to the trend or try to spin it?