The fight against IR35 isn’t over

With IR35 now in place, client businesses are responding with risk-averse decisions that are deeply damaging for contractors. Many are making blanket inside-IR35 judgements, mandating umbrella company use by contractors or even ceasing to engage contractors altogether.

These are the predictable consequences of IR35 – ones that we warned government about before the reforms were implemented, with IPSE research on the impact of IR35 published in the Daily Telegraph, the Financial Times and many other outlets.

Our long-running campaign against IR35 secured important concessions and delays, including the Small Business Exemption. Now, our focus is on pushing for a fundamental review and reform of the way self-employed taxation works and to ultimately make convoluted rules like IR35 unnecessary, whilst protecting our members and the wider self-employed community from the fallout from IR35 today.

Want to know more about IR35?


What's wrong with IR35?

IR35 is deeply damaging tax legislation which affects the UK’s smallest businesses. Under the new rules, the government has made end clients responsible for determining IR35 status, pitting business against business and resulting in even more contractors being unfairly taxed.

In these pages you will find information on why IR35 is so flawed, and why the government’s changes have made it worse.

What is IR35?

IR35 - often referred to as the "intermediaries legislation" or the "off-payroll" rules, is a tax regulation first imposed by the Labour Chancellor of the Exchequer, Gordon Brown, in 1999. Despite all sorts of pre-election or private promises to scrap, replace or reform IR35, it’s been made worse by every government since.

It tries to differentiate the tax treatment between a genuine contractor who's in business on their own account and a "disguised employee" who would, if the contractual chain is ignored, appear to be an employee of the end-user. The effect of this is that a business "inside" or "caught" by IR35 is forced to pay employee-like taxes, whereas a business "outside” IR35 will operate under the normal company tax regime just like every other company in the UK.

At IPSE we call your clients "clients" or "end-users" or "engagers" - they are never your employer and nor are you ever their employee, even if you're IR35-caught.

How has IR35 changed in the private sector?

If your client is a medium or large business, and is based in the UK or has a presence here, it now must determine the status of your engagement. The ‘fee-payer’ (whoever pays your ltd co – often an agency, sometimes the client) will be held liable if employment taxes aren’t deducted.

IPSE believe this to be wholly wrong - how can (and why should) an end-client be the arbiter of your company's tax affairs and modus operandi?

Not only has the decision-maker changed, but what your business has to pay in taxes has changed - the 5% allowance no longer applies, travel and subsistence expenses are not permitted and in some cases your business will even end up paying the Apprenticeship Levy - which other small businesses are normally exempted from. You may even end up footing the bill for Employers' National Insurance Contributions despite the fact that you're NOT their employee and they're your client, not your employer.

Find out more in our About IR35 section.

Why IR35 is so damaging for the UK’s smallest businesses

1. False accusations against freelancers

The main problem with IR35 is that it unfairly affects the smallest companies: freelancers. Numerous freelancers who legitimately use a limited company model to supply services have been falsely accused of ‘disguised employment’.

Worse, IR35 investigations can be long, intrusive and extremely costly for freelancers. They can even cause reputational damage, and many freelancers expend large amounts of time and money protecting themselves from the risk of IR35 investigation. If your client is ‘small’ it is still you – the contractor – that is responsible for determining status and it is you that HMRC will chase.

Since its foundation, IPSE has been campaigning against IR35 and its damaging effects on UK freelancers. Unfortunately, despite our hard work, IR35 remains on the statute book. That means everyone who provides services through their own limited company has to make sure they’re compliant with IR35 – or as compliant as it’s possible to be with such flawed and unclear legislation.

2. IR35 in the public sector

Since April 2017, responsibility for determining whether a contractor falls under IR35 has been moved away from the contractor themselves to the public sector body they are working for.

If the public sector client decides IR35 should apply then the contractor’s payments are taxed at source, as if they were an employee. It’s meant many contractors have moved out of the public sector, stalling numerous projects across Government.

3. IR35 in the private sector

In April 2021, the government extended the public sector changes to the private sector. As was the case with the public sector rollout, many private sector clients have reacted to IR35 by judging all contracted work to be “inside” IR35. This new environment for contractors has forced many to adopt less than satisfactory alternatives – this includes working through umbrella companies, entering permanent employment or retiring sooner than planned.

Find out more in our About IR35 in the private sector guide.

4. Working through an umbrella

Umbrella companies sit between contractors and recruitment agencies within the supply chain, providing payroll services to contractors on their payroll whilst supplying your services as its employee to clients.

Since the April 2021 changes to IR35, many limited company directors have had little choice but to enter this arrangement, leaving them to be taxed as if they are an employee on a payroll, without proper employment protections. This is not to say that employment protections are something the self-employed always want – freelancers choose to work outside the safety net of employment because they enjoy the flexibility to choose how, where and when they work.

Furthermore, the umbrella company sector is currently unregulated. There are many compliant payroll providers out there, but a lack of proper regulation has enabled some to engage in unscrupulous practices, such as withholding holiday pay and other activities that can place contractors in jeopardy. IPSE is pushing for better regulation of umbrella companies.

Nonetheless, the solution to contractors’ issues will not come from regulation alone – the solution will come from ending the confusion over employment status, a fundamental reform of self-employed taxation, and allowing those in business for themselves to enjoy the flexibility and freedom of freelancing again.


Myth: Contractors use limited companies just to avoid tax

No, this just isn't true. Contractors would often actually be better off if they were sole traders. The problem with that is that the protection of limited liability isn't available to sole traders but is pretty key to someone who might helping build a nuclear power station or designing banking systems. In addition, almost all end-users of contractors insist on a limited company model so that they're protected from tax claims which could arise if a sole trader fails to pay their taxes.

Myth: Contractors are just disguised employees

No, they really aren't. Contractors are small businesses and want to operate like that because they just don't want to be employees. IPSE has consistently found that more than 75% of contractors do not want a permanent job. Contractors enjoy the variation and flexibility of assignments, they enjoy the choice of the tasks they take on, they enjoy being able to dip in and out of contract. They often cite office politics and a dislike of hierarchical structures as the reason they want to stay as contractors. They rarely refer to taxation as a reason for being a contractor, but they do recognise that there is, as there rightly should be, a reward for being in business and taking on all the risks that entails.

Myth: Contractors aren't necessary, employment solves all the issues

Yes, they are. Can you imagine a business being forced to take on permanent employees for a two- or five-year project? Say a business wins a bid to build a new stadium which over the course of the project meant they had to hire 200 employees in engineering positions. At the end of the project they end up with 200 members of staff and no work for them to do, but they have an obligation to provide work to them or to make them redundant with all the costs of that. This would force up the costs of that stadium.

Businesses, and their clients, benefit from being able to engage the specialists they require for the time needed to complete their work. Which means everyone is able to access a pool of skilled, knowledgable and experienced contractors to deliver a successful project. But no-one is tied down by unneccesary commitments for full-time employees.

That's the real way business works, and how they can remain flexible and competitive in the modern world.

Myth: All contractors are being taken advantage of by unscrupulous employers who are avoiding their employment obligations

Whilst it's true that there are a few businesses which have done this, it's impossible to believe that this is commonplace or widespread. Whilst, for example, a whelk-picker may be conned into becoming self-employed by unscrupulous gang masters, it's beyond credible that a planning specialist in nuclear power station construction hasn't made a considered and careful decision to start their own business.

Myth: HMRC say they're losing £900m a year in taxes and it's growing

They may say this, but despite many, many requests both in Parliamentary questions and in Freedom of Information requests, they’ve never been able to actually demonstrate just how they arrive at this number. Ask them to show their workings and suddenly they become very, very quiet. IPSE has come to the conclusion that their figures are more "finger in the air" than properly evidence-based.

Myth: Contracting adds no value to UK plc

Wrong. Research by Kingston University shows that contracting, freelancing and self-employment is worth £305 billion to UK plc.

Further research by Professor Andrew Burke shows that they enable their client to be more innovative.

Myth: PAYE and full-time employment is the only workable model

This is an anachronism. Full-time employment was almost unheard of prior to the Industrial Revolution when the world of work changed, and that and PAYE are relatively new models. With the advent of modern systems, PAYE is in fact old-fashioned and constraining - but it is really, really easy to administer and perpetuate so it's seen by HMRC as the ideal. 

The world has changed again, the internet knows few national boundaries, the world moves at a far faster pace than ever before and modern working has to recognise this and the requirement for flexibility and agility. In fact, full-time employment is likely to be seen, in just a few years, as a blip in the arc of the progress of modern work.


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Learn more about IR35

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