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Contractor numbers and the contracting landscape in the UK and Europe

Contractor numbers throughout the UK have undergone a sustained period of growth post-millennium which looks likely to continue as more workers actively choose to start their own contracting and freelance business.

This is the conclusion drawn from numerous reports detailing recent developments to the contingent workforce. The reports highlight emerging trends both within the UK and in Europe, showing that the UK economy is amongst the most attractive for knowledge workers looking for more rewarding working options.

“The landscape, as it stands, looks promising for contractors. More people are providing services on their terms and the economy as a whole is benefitting,” comments ContractorCalculator CEO Dave Chaplin.

However, the body of research also highlights that contractors are facing many challenges, which include a skills crisis, a complex tax and regulatory environment and the refusal of policymakers to acknowledge that contracting is a legitimate alternative to employment.

The contracting landscape, at a glance:

  • Contractor numbers in the UK stand at roughly 1.90m, up by more than a third since 2008
  • UK contractor-owned businesses believed to have contributed roughly £109bn to economy in 2015
  • Contracting flexibility attributed to aiding UK recovery from 2008/09 financial crisis
  • Roughly 90% of clients report to engage with contractors to gain short-term access to key skills
  • London and the South East account for almost half (44%) of the UK contractor workforce
  • Of all EU countries, only the Netherlands, Poland and France have more rapidly evolving contract markets than the UK

How large is the UK’s contractor workforce?

The Department for Business, Innovation and Skills study, Self-Employment in the UK, reports that self-employment numbers, as of 2014, stand at 5.2m - a 51% increase since 2000. Latest statistics from the Office for National Statistics (ONS) indicate that self-employment numbers in the UK currently stand at around 4.7m.

Contractors account for roughly a third of this margin, according to recent Kingston University research, which reports that contractor numbers in the UK have risen to 1.88m. This represents an 8.7% rise over the past year alone.

A more recent study by John Kitching - ‘Exploring the UK Freelance Workforce in 2015’ - cites Labour Force Survey (LFS) data which suggests that are currently an estimated 1.91m contractors in the UK, 1.65m of whom contract as their primary source of income.

Contracting has undergone a sustained period of growth

Recent growth has been rapid, and looks likely to continue. A study by Patricia Leighton, Professor of European Social Law at the IPAG Business School, called Future working: the rise of Europe’s independent professionals (iPros), suggests that contractor numbers have increased at an even more significant rate over the past decade.

According to Leighton, the number of ‘iPros’ – classed as individuals who work for themselves and engage in highly skilled service activities, rather than the farming, craft or retail sectors – in the UK has risen by 63% since 2004.

Meanwhile, Kitching’s analysis suggests a similarly sharp upswing in the popularity of contracting in the UK. It claims that, since 2008, contractor numbers have risen by 36% from roughly 1.40m to 1.91m, adding that contract work continued to show strong growth throughout the global financial crisis of 2008/09.

“Whilst the statistics fluctuate slightly, they all point towards significant and sustained growth in the contracting sector, proving that it is becoming an increasingly viable and popular working arrangement for knowledge workers across the UK,” notes Chaplin.

How do contractors operate?

There’s slightly more ambiguity when it comes to determining the trading vehicles used by contractors. Of the 5.24m total UK private sector businesses highlighted in the Government’s Small Business Survey 2014, almost 4m had no employees, representing 76% of all UK enterprise. Of these businesses, 16%, or 635,000, were reported to be private limited companies.

These findings suggest a reduction in the number of one-person limited companies from the 818,000 recorded in the 2012 study, although it is worth noting that many of the limited companies surveyed will not be knowledge-based service providers such as contractors.

During the House of Lords Select Committee on Personal Services Companies (PSCs) inquiry, HMRC estimated that 200,000 workers operate through a PSC. This is an approximate increase of 122% when compared with 1999, indicating a significant post-millennium change in the way that people work.

The Freelancer and Contractor Service Association adds that umbrella company contractors also make up a significant margin of the contingent workforce, after surveying almost 100,000 umbrella workers.

Who’s fuelling the growth?

Much of the growth in contractor numbers has been down to an influx of contingent workers in the IT and communications sector, the Kingston study claims. Compared with 2008, the industry has seen a 71% increase in candidate availability.

The construction sector also appears to be quite buoyant. The industry accounts for a significant portion of businesses with no employees, as indicated by the Small Business Survey. 20% of this group ply their trade in construction, totalling almost 800,000, whilst professional, scientific and technical activities make up 15% and almost 600,000 of the margin.

Geographically, the Kingston study shows that the contracting population is largely concentrated in London and the South East of England. London accounts for a 21.6% share of the contractor workforce, whilst the South East makes up 22.3% of the total.

Meanwhile, the same report also reveals that contracting is becoming an increasingly viable and attractive option for women and mothers, as more females than males are making the move into contracting. In 2014, the numbers of female contractors increased to 746,430 - 39.6% of the total.

How do we compare on an international scale?

It comes as little surprise that the UK has one of the leading contractor markets in Europe, according to Leighton. With the number of ‘iPros’ having risen by 63% since 2004, the UK has the fourth highest rate of growth in the European Union (EU).

This exceeds the average rate of growth of 45% amongst all 27 EU member states surveyed, and is behind only the Netherlands (95%), Poland (88%) and France (85%). Proportionally, the amount of the working population in the UK deemed to be iPros is 2.1%, again behind the Netherlands at 2.9%, but significantly greater than Italy and Germany (both 0.8%).

This is considered to be largely down to local attitudes towards flexible working arrangements, with the latter countries having stricter regulation over professions.

Contractors benefit the economy

The contingent workforce has also been recognised for its contribution to getting the UK economy out of recession, with a recent study by Bank of England senior economist Professor Stephen Millard attributing the country’s economic recovery to flexibility in the labour market.

This acknowledgement has been validated by figures provided by the Association of Independent Professionals and the Self Employed (IPSE) which suggest a correlation between growth in contractor numbers and the UK’s ability to cope better with the economic crisis.

Kitching estimates that contractors delivered a boost worth approximately £109bn to the UK economy in 2015. This figure was reached based on the overall turnover by businesses without employees in 2015 (£237bn) and the portion of those businesses that were freelancer-owned (46%). However, due to the “more valuable knowledge and skills exercised”, it stands to reason that the contribution made by contractors was even higher.

“The figures show that contracting not only provides flexible, convenient working arrangements for contractor and client, but that it also helps to generate a more resilient economy as a whole,” Chaplin adds.

Contracting in the future

The contracting sector looks set to continue to grow over the years to come, as more professionals recognise the benefits of flexible working. Morgan McKinley’s UK Salary Guide 2016 acknowledges an increase in permanent employees considering contract opportunities.

Similarly, contractor demand is showing little sign of slowing down, as skills shortages persist. According to ManpowerGroup’s 2015 Talent Shortage Survey, 38% of firms worldwide report difficulty filling roles. With the UK faring relatively well – 14% of UK firms are impacted by skills shortages – contractors who struggle to find work close to home could find greater success plugging skills gaps overseas.

However, as ManpowerGroup CEO Jonas Prising highlights, contractors will have to work hard to ensure their skills don’t become obsolete: “The working population is declining, forcing employers to select from shrinking talent pools. Technology is evolving faster than ever, changing the skills needed for jobs and shortening the life cycle of those skills.”

Contractors are also increasingly being recognised as catalysts for innovation and growth, as opposed to a means of navigating peaks and troughs in demand. According to the Recruitment and Employment Confederation‘s (REC) monthly JobsOutlook reports, the proportion of firms reporting to engage with contractors to gain short-term access to key skills is on the rise (roughly 90%).

Sector by sector comparison

By sector, prospects look largely promising. The rise of the digital tech economy – particularly the emergence of digital roles in traditionally non-digital sectors – looks set to generate plenty of opportunities for IT contractors, as Tech Nation 2016 indicates.

Morgan McKinley also indicates that contractors will be highly sought-after by Fintech firms. Cyber-security is another potentially lucrative niche market for contractors to consider.

Demand for finance contractors has moderated over the past year. This is a result of economic uncertainty caused by various macroeconomic factors which have impacted the sector as a whole. However, there remain several sub-sectors where contractors can command high day rates.

Oil and gas contract opportunities look set to remain scarce as the sector continues to suffer in the wake of the oil price downturn. Headcounts are continually being slashed as firms respond to cost pressures. However, Hays’ Oil and Gas Global Salary Guide 2016 suggests clients should continue to engage with contractors to avoid an industry “brain drain” and subsequent skills shortages.

Construction output in the UK continues to rise at a healthy pace, resulting in increasing contractor demand. The Government has set out plans to build 1 million new homes by 2020 – a target which contractors are expected to contribute heavily to.

Demand for construction contractors is also high around the world. ManpowerGroup notes that skilled trades – a category which encompasses construction workers – is the sector in which most firms are struggling to source candidates.

Is there any cause for concern?

Leighton raises concerns that the future development of contractors may be limited by a lack of structured training to build technical and business skills. Whereas employees will often undergo training funded by their employers, contractors typically don’t have this option.

Whilst the Government invests in skills policies to maintain a prominent position for the UK in international league tables for education, training and competitiveness, Leighton believes that similar measures should be taken to support the contingent workforce and aid them in maintaining the UK’s competitive advantage in the global economy.

Conversely, European I-Pros: A Study, by Stephane Rapelli, suggests that a contractor’s status as a knowledge-based service provider is indication that they are already sufficiently equipped.

Rapelli has determined that more than half (53%) of EU iPros have a ‘high’ skill level, meaning they have undertaken a level of training equivalent to a higher education qualification. This figure rises to 69.3% in the ‘professional, scientific and technical’ category, which accounts for core contracting sectors such as engineering and construction.

What challenges do contractors face?

The never-ending challenge for genuine contractors is the distorted perception of their tax affairs. The assumption by the tax authorities and policymakers is that incorporation is largely tax motivated. Whilst tax efficiency undoubtedly plays a part, it is not the primary reason.

A November 2013 survey by IPSE, cited within the House of Lords Evidence document, found that 54% of 1,395 limited company contractors had incorporated because their agency or client wouldn’t otherwise engage with them.

Within its recent ‘Small Company Taxation Review’, the Office of Tax Simplification (OTS) asked limited company owners what influenced their decision to incorporate. Whilst limited liability (85%) and enhanced credibility (80%) were deemed the most influential factors, 59% claimed they had to do so to meet criteria for suppliers on certain contracts. Meanwhile, only 34% claimed that tax savings played a part in their decision.

Is mounting policy likely to deter contractors?

Recent and potential future UK policy reflect the Government’s stance. Limited company contractors have recently been subject to dividend tax hikes whilst many umbrella contractors – and all personal service company contractors caught by IR35 – have lost access to travel and subsistence expenses tax relief.

Most recently, the Government has proposed reforming IR35 legislation in the public sector, whereby the end engager will be responsible for determining the contractor’s IR35 status. If implemented, this looks likely to result in many contractors being unjustly forced onto the payroll as clients adopt a risk-averse approach.

A survey by Aldwych Partners also found that more than half (53%) of locum doctors claimed they would seek work outside England if the now mandated NHS pay caps were introduced.

Overseas opportunities will become an increasingly tempting proposition for contractors for as long as the Government continues to enforce stricter policies – with subsequent worsening skills shortages a distinct possibility. With experts predicting that the public sector proposals will eventually be rolled out to the private sector, any migration of talent outside of the UK would be far more extensive.

Updated: Thursday, 28 April 2016

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