Were there unintended consequences for the UK self-employed arising from the introduction of IR35 legislation in 2000? This research has 3 core questions;
- What happened to the natural inflow rate into self-employment in the UK after the introduction of IR35?
- What happened to the natural outflow rate from self-employment in the UK after the introduction of IR35?
- For those that were forced to exit self-employment by IR35, did their incomes, hours, and happiness change for the better or worse?
The UK has undergone a massive period of growth in self-employment since 1972 and this has been underpinned by broad cross-party government support for entrepreneurs and entrepreneurship since 1979. Governments have been keen to reward entrepreneurial activity, and this has manifested itself in the tax system by favourable tax treatment for people starting and growing their own businesses. IR35 is the most significant piece of legislation that directly opposes the political consensus regarding supporting entrepreneurship and small business activity.
A new body of firm growth literature has established that firm growth rates, and the incomes of entrepreneurs, are not Gaussian and more closely resemble the symmetric exponential or Laplace distribution. That is most firms do not grow (or decline) but a small number experience fast rates of growth or decline. In the context of IR35, selection dynamics (at entry and exit) capture these ‘outliers’. In this research we are interested in a wider set of outcomes, hours of work, happiness, and income, and how these different dimensions co-evolve for entrepreneurs displaced by IR35 legislation.
Using SVAR (Structural Vector Autoregressions to exploit the non-Gaussian nature of the distribution to identify the latent causal ordering, we build upon the LiNGAM (Linear Non-Gaussian Acyclic Model) originally developed in the neuroimaging and machine learning literature to explore lagged effects and causal ordering as these three dimensions co-evolve over time.
We propose to conduct the bulk of the empirical analysis using Waves 1-18 of the BHPS and for more recent data the Understanding Society data set.