Contractors, only the taxman knows IR35’s true cost, not that he’ll tell you

When IR35 was introduced, the government claimed it would create fairness in the tax system.

What it actually did, from 2017 and in earnest from 2021, was dismantle one of the UK's most productive sectors. The off-payroll working rules have forced thousands of small companies to close, and pushed skilled professionals into 'zero-rights' employment models.

The damage is not only social. It is economic, measurable, and getting worse, writes technology consultant Nadine Drelaud.

Bob, a realistic example of a contractor unacknowledged by HMRC

Before the IR35 reforms, people like Bob ran legitimate small businesses.

Bob is neurodivergent and thrived as an independent consultant.

For over 20 years, Bob built Tech Minds Ltd into a thriving company with global clients.

In 2021, Bob's personal service company generated £600,000 a year in revenue (plus VAT).

He paid himself a salary of £80,000, employed four staff on £30– 45k, and even used up to 12 sub-contractors in busy periods.

Pre-IR35 reform, what taxes did an outside IR35 contractor pay HMRC?

Through Tech Minds Ltd, which at one stage had a portfolio of five clients, Bob contributed to HMRC, and in turn, to HM Treasury across multiple tax streams:

Bob also created UK jobs and reinvested profits in growth.

What happened when IR35 was reformed in 2021?

When IR35 rules changed on April 6th 2021, and potential HMRC liability moved to the end-client, panic spread through corporate procurement.

Three of Tech Mind's clients offshored their work to India.

Two other Tech Mind clients imposed "umbrella-only" engagement rules on temporary staff.

Overnight, all of Bob's company revenue was to be treated as if it were Bob's personal salary. This was instead of Bob's business, like all other businesses, being able to offset costs against revenue before tax is applied. This meant he could no longer pay staff, cover costs, or hire other contractors, because HMRC taxed the business revenue as if it were salary rather than revenue, which should have had the costs of providing the service removed prior to taxation.

The result? Tech Minds Ltd closed.

Its four employees were made redundant.

The economic collapse that nobody is counting

Bob's story is not rare. A bit of it may even be autobiographical!

What ministers, policymakers and HMRC don't seem to realise is that Bob's story has been repeated tens of thousands of times across the UK.

Each company closure wipes out a chain of tax payments and local spending.

The suspiciously absent six

Here is what every formal or informal HMRC impact assessment of the IR35 OPW rules, or research on IR35/OPW, which it has commissioned, conveniently appears to omit or not look at:

By not disclosing these six, HMRC instead focuses narrowly on PAYE and NIC collected from Inside IR35 roles and, on that thin basis, typically declares IR35 reform 'a success.'

The tax department is ignoring the far larger losses across half a dozen other major tax categories.

What HMRC is doing instead – keeping the lid on five data points key to IR35's impact

HMRC often highlights small compliance 'wins' with IR35, as a policy, while tending to avoid any macro-economic analysis of how this rule has impacted the UK.

The tax office claims increased PAYE receipts prove that the revised IR35 policy works well. Yet for a full picture of IR35's huge and detrimental impact, HMRC ought to publish these five:

This is not a data gap because HMRC no doubt holds the information.

Rather, it appears to be a deliberate design choice not to disclose these details, and only with these details can an accurate picture of IR35's reform impact start to take shape.

The current government (like the last administration) only appears to measure what flatters IR35, as a policy, and ignores what would reveal its effects, which are widely acknowledged to be damaging and entrenched.

The offshoring effect

Large corporates did not absorb IR35 risk under the OPW rules. They avoided it.

They sent work abroad, mostly to India and Eastern Europe, where they can pay less and face no HMRC scrutiny. Those contracts once delivered high-value tax revenue to the UK. Now they deliver nothing.

The Treasury loses VAT, PAYE, NIC and corporation tax, yet HMRC still hails IR35 to be a 'success' because PAYE within the shrinking domestic market has risen slightly.

It really is a falsehood for anybody to claim IR35 has increased tax revenue when HMRC/HMT only lets us see a fraction of the relevant data. The government simply doesn't disclose all of the tax revenue streams involved or affected by IR35, or relevant to the impact that IR35's effects have on the UK's finances.

The human cost

The human impact is as devastating as the fiscal one.

Highly skilled professionals who built businesses over decades have been forced onto benefits. Neurodivergent and disabled entrepreneurs, who make up around 25 per cent of all UK business owners, have been excluded from the workforce. They lost the flexibility and autonomy that self-employment provided.

Inside IR35 contractors are now zero-rights workers. They pay more than full employee tax but receive none of the protections: no sick pay, no pension, no maternity or paternity pay, no job security, no redundancy rights.

To add to the unfairness, they also have to cover the 15 per cent Employer NIC, umbrella fees of around £40 per week, and, usually, the apprenticeship levy of around £25 per week.

In Bob's case, he is now paying between 56 and 61 per cent in taxes and deductions.

So much for IR35 bringing in a 'fairer tax system.'

How are people supposed to survive when they are only taking home around 40 per cent of their earnings, yet still carry the additional burden of zero rights and no statutory protections?

The umbrella problem

To make matters worse, some umbrella companies have failed to pass on the taxes they deduct.

• Industria Umbrella Ltd was fined £1 million for concealing a loan scheme.
• HMRC reportedly estimates £2.85 billion in unpaid taxes from umbrella non-compliance between 2025 and 2030.
• From April 2026, new PAYE rules will hold agencies and clients jointly liable for unpaid umbrella company tax, which shows HMRC already knows the current system is leaking.

Yet again, the burden falls on workers while HMRC quietly reshuffles the liability rather than fixing the root cause.

IR35: the REAL truth

IR35 did not increase UK tax revenue overall. It decimated the contractor industry, offshored billions in tax revenue and took hope of a better life away from millions of citizens.

IR35 did not protect UK jobs. It exported them.

It did not create fairness. It proliferated inequality.

It did not strengthen the contractor and atypical work economies. It's almost killed it.

Based on modelling from real SME data, national contractor figures, and other sources including data on offshoring, I estimate that the UK economy is now losing around £100 billion in combined tax, output and welfare impact every year from IR35-driven offshoring and SME collapse.

Even if that number were halved, it would still represent one of the largest self-inflicted losses in modern UK fiscal policy.

Yet the government and HMRC continue the IR35 'cover-up.' Why? To protect themselves from the shame of an ill-thought-out policy, executed terribly.

Final thought

It's hard to believe there's not a bigger plan than 'just' IR35 in play here: to control the population, strangle economic mobility and ensure money and power stay safely in the hands of the uber wealthy, while all other individual workers face the control and monitoring of the PAYE system. But at what cost? If the taxman's got anything to do with it, I fear we'll never truly know the answer.