How IR35 inflated an £8.5bn consultancy bill — and tests Burnham at the Budget

A ContractorUK reader’s remark on August 8th 2026 that IR35 reform of 2017 and 2021 signalled “bonus time for external consultancies” has more than a grain of truth to it, and it’s a key component of totting up IR35’s true cost to the taxpayer.

Just eight firms — Deloitte, EY, KPMG, PwC, McKinsey, BCG, Bain and Accenture — have collectively won a hefty £8.56bn in public sector contracts between 2019 and 2025, reportedly according to Tussell, a data group. That’s half of the calculation already done for new chancellor John Healey — I hope he does his own totting up ahead of October 28th’s Autumn Budget, to really get to the bottom of IR35’s total cost.

One IR35 driver of the £8.56bn bill?

Well, when the IR35 reforms arrived in the public sector on April 6th 2017, most taxpayer bodies didn’t assess each contractor individually as the legislation required. They instead ‘blanketed’ or banned PSCs. Yet the workloads did not disappear. The eight management consultancy giants were among those who hoovered it up, albeit often at two or three times the cost to the taxpayer.

The private sector in 2021 went one better (as far as some say HMRC’s intent is concerned). End-client companies stopped hiring contractors altogether. The resulting IR35-powered windfall for giant, privately owned consultancies might not trouble Labour’s new top brass. But the largely IR35-inspired £8.5bn consultancy bill that the public sector has racked up on these big consultancies now lands on Mr Healey’s desk. His first Autumn Budget, under Andy Burnham’s sign-off, is the government’s first real chance — and Mr Burnham’s first real IR35 test — to stop paying it, writes Josh Toovey, head of policy and research at IPSE.

IR35: A very British problem

In my six years specialising in research for the UK’s self-employed association (IPSE), and before that as a research analyst for Cambridge University, I’ve learnt that Britain has a remarkable talent for self-harm dressed up as reform.

We identify a problem, reach for the bluntest instrument available, swing it with tremendous confidence and then spend the better part of a decade paying for the consequences — while insisting, with equal confidence, that the consequences are somebody else’s fault — HMRC blaming contractors, for example, for wanting to ‘disguise their employment.’

IR35 and the contractor market are the definitive example.

After all, on sight of reformed IR35, the UK pulled down the shutters on contractors altogether, watched experienced specialist talent walk out the door, and then expressed genuine bafflement when transformation programmes stalled and projects haemorrhaged money.

How much has the public sector’s IR35 workaround — consultancies — cost?

Definitive, apportioned figures for the consultancy workaround to IR35 reform are notoriously hard to come by — especially for the private sector, where equivalent data are yet to emerge. But we do know that spending on management consultancies in the public sector rose by 62% between 2019–20 and 2023–24, according to Tussell’s reported figures. That’s before counting the £400m public sector bodies have separately paid out for failing to implement and follow the 2017 rules on IR35 correctly — a different cost altogether, but one that lands on the same taxpayer.

Chancellor Healey’s predecessor, Rachel Reeves, looked at the public sector’s consultancy bill and recoiled, which was the right instinct. She pledged to halve consultancy spending by 2026. But, more specifically, the former chancellor had the right reaction to the wrong diagnosis. You cannot fix a workaround by banning the workaround. You fix it by dismantling the conditions that made the workaround necessary in the first place. In this case, that’s the IR35 reforms.

The labour market is cooling. The barriers to contractors aren’t thawing

The wider labour market makes the continued overreaction to IR35 even harder to justify.

Vacancies are at a five-year low and the number of payrolled employees is falling year on year.

Businesses are operating in a weaker economy, under pressure to control costs and make better use of the talent already available to them.

So why aren’t the barriers coming down?

Many end-users continue to operate blanket PAYE-only policies, turning away limited company contractors simply because assessing IR35 status is seen as too much hassle or risk — rather than, as you might expect amid pressure and efficiency-asks, making greater use of flexible, specialist workers.

Herein lies the absurdity at the heart of the current system. At precisely the moment that UK businesses need more flexibility, the rules and HMRC fear surrounding them are making it harder to access it. IR35 was intended to tackle disguised employment. Instead, reformed IR35 has helped create a labour market where businesses routinely treat genuine contractors as a problem to be avoided. This approach makes little sense for employers, contractors or an economy that is supposed to be trying to grow. It’s self-harm to all UK stakeholders.

Other than IR35, what else makes it harder to be a self-employed contractor?

The tax-free dividend allowance has been slashed from £5,000 to £500.

Companies House fees have climbed.

Compliance costs for most contractor limited companies have multiplied.

So IR35 wasn’t and isn’t the only thing making it harder to work for yourself.

While both public and private sectors have adjusted to the OPW rules in their own graceless ways, the wider regulatory burden on the self-employed, it seems, just keeps accumulating.

Has Andy Burnham promised to fix this?

Yes, in 2015, Mr Burnham regretted that the self-employed appeared to be treated as a policy “afterthought,” saying: “Under my leadership these vital members of the workforce will no longer be an afterthought.”

This slow tightening of the screw on the many thousands of UK individuals who are ‘in business on their own account’ sits awkwardly against those words from our prime minister.

The 2026 Autumn Budget will test whether he does something about it.

How much has the toll actually been?

On its own, the raid on the dividend allowance (set at its lowest yet for 2026/27) isn’t catastrophic.

But taken together, and landing on businesses already navigating the IR35 fallout, the cumulative effect of government policy changes has been brutal.

Putting a number on it, though, is probably as hard as putting a number on the true cost of IR35.

How many contractors have closed due to IR35 reform?

IPSE research shows that two in five company directors have closed their limited companies since IR35 reform. I’ve previously written about the decline of the UK company director, and our numbers sadly only strengthen that case.

Those contractor-directors who remained were pushed towards quasi-employment umbrella arrangements that they did not want or benefit from. And with those models came reports of opaque fees, deductions and withheld holiday pay.

The result was a labour market that became more expensive, less flexible and ultimately harder for contractors and businesses to navigate.

What must Burnham and Healey do next?

Prime Minister Andy Burnham and his chancellor John Healey must rebuild the labour market they’ve inherited — decimated by April 2025’s employer National Insurance changes that appear to have been the final nail in the coffin for a hiring space that had already been struggling for years. Their rebuild requires fixing the conditions that drove contractors out in the first place, and it means restoring some stability to a tax regime that has lurched from one overcorrection to the next. They must begin on October 28th. If they do act then, this government could quickly deliver on some of its own growth aspirations, which surely doesn’t include paying billions and billions to big consultancies.

The takeaway

I’m sure I speak for many in the contractor sector when I say we won’t be holding our breath for Burnham and Healey to act against IR35 reform. However, if you agree that an ‘IR35 reset’ is imperative, tell HM Treasury your thoughts on its Autumn Budget stakeholder representations portal.