HMRC off-payroll update: What new IR35 research from the taxman isn’t telling you

Three ‘umbrella company’ articles in a row on ContractorUK go some way to showing just how significant changes for umbrella companies and their users might be.

But umbrella contractors aren’t the only contingent workers who may have had their ‘Spring Statement’ before Spring Statement. 

Not only have limited company contractors received confirmation that the ‘small company’ thresholds are to be updated (with as many as 14,000 extra end-users to potentially be exempt from the off-payroll working rules), but on Feb 27th 2025, HMRC quietly published new research on IR35 reform.

What’s HMRC’s off-payroll working rules update called?

The research is entitled “Update to the impacts of the 2021 off-payroll working rules reform in the private and voluntary sectors,” writes Matt Fryer, managing director of Brookson, a People 2.0 company.

For those who, like me, have followed HMRC’s approach in the IR35 space over the course of successive governments, this official update on the impact of the off-payroll working (OPW) rules - also known as IR35 reform - does not make for surprising reading. 

HMRC’s view -- implied throughout its update -- that IR35 reform has been a resounding success, is not reflected by large proportions of the flexible workforce, whose businesses have been severely and adversely impacted by the IR35 changes of April 6th 2021.

It’s highly unlikely IR35 off-payroll working rules will be altered or axed

The therefore still-burning question for many contractors and supply chains is whether the IR35 reforms (effective in the public sector, too, since April 6th 2017) will remain in place or whether they will be repealed. 

To my mind, this update provides a very clear view that HMRC is happy with the way that the IR35 legislative change has panned out.

It is therefore highly UNLIKELY that any significant changes will be made to these much-disliked rules in the short to medium term. 

HMRC’s off-payroll and IR35 research: my three top takeaways from the March 2025 update

Looking at the HMRC update of Feb 27th, there are three interesting takeaways for me:

1. Increased cost to the supply chain

HMRC has identified that IR35 reform (in the private sector) has collected £4.2 billion of additional tax and NIC. 

This £4.2bn is estimated to equate to a £10,000 annual increase in tax paid per worker affected, which is a significant sum for an individual contractor. 

Sleight of hand by the taxman

Interestingly, HMRC tries to steer the reader away from the net take-home pay impact on workers, instead trying to focus attention on potentially increasing contractor pay rates. 

The update attempts to portray that pay since April 6th 2021’s IR35 reform has been positive for many contractors, as HMRC states: “Those PSCs…who changed payrolls around the time of the reform tend to have above average earnings compared to the whole of the UK population.” 

Contractors are (apparently) better off

This is an interesting view from the government as the picture being painted is that individuals impacted by the changes are somehow better off. 

Also, the update states: “This does not necessarily mean that post-tax take home pay has fallen for all workers affected as some individuals have reported an increase in pre-tax incomes.” 

HMRC skips over inside IR35 hiring’s higher costs

The emboldened part, although not specifically called out in the report, implies that in some instances, it is now more costly for an end-client to engage with a contractor. 

We know this is now the case, as many contractors negotiate rate increases with their clients to ensure that they maintain the same or similar net pay for their client-determined ‘inside IR35’ contract. 

2. Changes to the way workers provide their services – the rise of the umbrellas (and exploitation)

The section in the update on how the off-payroll rules have changed the way in which workers provide their services plays down one significant point – the changes have driven the use of non-compliant umbrella companies. 

The use of an umbrella company to pay an individual working on an inside IR35 contract is a neat solution.

HMRC doesn’t go into displaced PSC workers

However, over the last few years, we have seen a proliferation of tax avoidance (in some cases ‘tax evasion’) schemes masquerading as umbrella companies. These scheme providers have sought to take advantage of the displacement of workers requiring a new payment model.

 This has resulted in HMRC now looking to regulate umbrella companies – as I alluded to at this article’s introduction -- as they believe there to be a circa £500 million per year tax gap created by this.

Please note, we in the contractor industry and taxpayers at large have yet to see any evidence or rationale behind this figure of £500m. I find it hard to understand how this fact – the exploitation of displaced PSC workers – is not included in this update.

3. How many impacted workers are now in ‘false employment?’

A critical area which is not addressed in the HMRC update is an analysis or estimate of the number of individuals working on contracts which should NOT be treated as being employed for tax purposes, but have been treated so due to blanket inside IR35 determinations or a ban on the use of the PSCs. 

HMRC isn’t telling you, but this two-fold approach by UK organisations hiring temporary talent is still common. It’s driven by risk-averse or badly advised end-clients. 

Blanketing and banning effects on limited company workers (cont.)

The two-fold approach has driven many negative outcomes and continues to drive many negative outcomes.

For example, a reduction in take-home pay for individuals wrongly made to work on an employed for tax purposes basis; a restriction on the access to specialist skills for the end-hirer and UK plc overall, and increased costs of the contract. 

Given the topics HMRC discusses during the update, it seems strange that no attempt has been made by the tax office to try to identify how many contracts have been affected in this way due to a misapplication or lack of understanding regarding the off-payroll rules.

In conclusion, this IR35 update tells only some of the OPW story…

In conclusion, while there’s quite a lot HMRC isn’t telling us in this update, I do not see any change of stance from the government regarding its perceived success of IR35 reform, which I believe is here to stay. 

Work does however still need to be done to continue to educate end-clients and supply chains on how the off-payroll working rules operate and how they can comply with them.

Depending on the direction of travel regarding umbrella company regulation (which is likely to result in more tax risk for agencies and end-clients) we may see a rebalance of the risk scale which could then drive more of an appetite to apply the off-payroll working rules correctly.