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Imagine trying to grow your business or freelance career, only to find yourself trapped by rules meant to tackle tax avoidance but instead catching honest professionals. That’s exactly what thousands of contractors and small businesses face under IR35.
What started as a policy aimed at fairness has morphed into something far more damaging: a hidden tax on growth.
So why does IR35 remain stubbornly in place despite growing calls for reform?
A rule that backfired
The goal seemed simple enough when the IR35 reforms were rolled out, first in the public sector in 2017 and then extended to the private sector in 2021. The government wanted to clamp down on “disguised employment”, where individuals worked like employees but paid taxes as contractors through limited companies. However, implementing the reforms shifted the responsibility from contractors to the companies that hire them.
That single shift triggered a domino effect no one seemed prepared for. Suddenly, businesses – not the contractors themselves – were liable for determining the correct employment status. If they got it wrong, the taxman would come knocking, and the penalties could be steep. Faced with that risk, many businesses panicked. Some imposed blanket assessments, declaring every contractor “inside IR35” just to be safe. While others stopped engaging contractors operating through personal service companies altogether.
What’s worse, those blanket assessments are technically non-compliant under the very off-payroll rules they aim to follow. Yet, for many businesses, it felt like the only option in an impossible situation: comply imperfectly or risk costly investigations. This unintended side effect has paralysed the hiring of flexible talent across entire sectors.
A rule intended to prevent tax avoidance has inadvertently restricted opportunities for contractors and businesses, hindering growth and flexibility.
The human cost
For the people at the sharp end, the consequences have been life-changing. Contractors who once thrived in flexible, project-based roles have found an ever-shrinking market, through no fault of their own. According to IPSE, more than one in ten contractors is now out of work directly because of IR35. That’s not just an inconvenience; it’s lost income, lost livelihoods, and lost career momentum.
Faced with uncertainty, many contractors have turned down roles deemed “inside IR35”, and understandably so. These roles tax contractors like employees but offer none of the benefits – no sick pay, no holiday entitlement, no pension contributions. It’s the worst of both worlds: the tax burden of employment without the security that employment provides.
When the changes hit home
For many contractors, the changes hit home in deeply personal ways. Take Tom, an experienced IT consultant who’d worked independently for over a decade. After the reforms, his main client imposed a blanket inside-IR35 policy, cutting his take-home pay by nearly 30% overnight.
Comment: “I didn’t just lose income; I lost control of my career”
Or consider Rachel, a freelance marketing strategist who turned down multiple contracts last year because she couldn’t afford the tax hit of inside-IR35 rates – yet couldn’t secure outside roles either.
Comment: “It’s like being stuck in a no-win situation”
The frustration has reached breaking point for many. A quarter of contractors are now actively planning to work abroad to escape the restrictions, taking their valuable skills and expertise with them. Others have been forced into permanent roles they never wanted, compromising their independence and flexibility to maintain financial stability.
This isn’t a niche problem affecting a handful of specialists; it’s a widespread, systemic issue that is driving highly skilled professionals out of industries that rely on their agility and expertise.
Growth on pause
But it’s not just individuals who are paying the price because businesses are feeling it, too, at all levels. The Confederation of British Industry (CBI), Britain’s largest business lobby group, has warned that IR35 imposes a “significant administrative burden” on companies.
Recruiter trade body APSCo welcomed the recent changes but highlighted the growing financial liabilities its members face because of the reforms. The think tank Onward has identified IR35 as a significant barrier to entrepreneurship in the UK, noting that off-payroll working regulations have increased the freelance tax bill by £1.5 billion and led to 35% of freelancers being out of work.
Why does this matter?
It matters because small businesses, freelancers, and consultants aren’t just background players in the economy but engines of innovation and growth. Between 2008 and 2019, self-employment grew by nearly 30%, helping Britain recover from the global financial crisis and other challenges. Contractors and independent professionals played a key role in that recovery, bringing specialised skills and flexibility which permanent workforces couldn’t provide.
Since 2020, the UK’s private sector business count has decreased from six million to 5.5 million, influenced by factors including the IR35 reforms, the COVID-19 pandemic, and Brexit. Not all of the decline is down to IR35, but the message is clear: adding red tape to flexible work discourages entrepreneurship, slows growth, and risks turning away the very talent that businesses need to thrive.
Yet still, the government holds the line.
A glimmer of change
In April 2024, HMRC introduced a new “offset mechanism” to fix one of the system’s most glaring injustices: double taxation. Previously, if a contractor was wrongly assessed as outside IR35, both the contractor and the client could end up paying tax on the same income. The new rules allow HMRC to offset tax already paid by the contractor against the client’s PAYE liabilities, preventing a duplication of tax payments.
It’s a welcome correction, but it doesn’t go far enough. The offset doesn’t apply retrospectively, so past disputes remain unresolved. Also, it doesn’t cover employers’ National Insurance contributions, meaning businesses still shoulder significant risk. While this adjustment shows that HMRC is starting to acknowledge some of the system’s flaws, this is just a short-term sticking plaster, not a permanent fix.
The Treasury’s reluctance to go further reflects a broader policy tension: while the reforms raised £1.8 billion in extra revenue, they’ve created friction in the flexible labour market. By protecting tax receipts, HMRC risks weakening the entrepreneurial ecosystem that helped drive recovery after recent economic setbacks. At the moment, political appetite for an overhaul remains low despite the economic cost.
What you can do
If you’re a contractor navigating this landscape, it’s vital to protect yourself. Review your contracts and working practices to ensure they support your status as genuinely self-employed. Seek clients that fall under the small business exemption or those willing to work transparently to assess IR35 status fairly. Also, consider diversifying your client base or exploring sectors where the risks and restrictions of IR35 are less severe.
For businesses, it’s no longer enough to rely on blanket approaches. Each engagement needs a robust, well-documented assessment process that stands up to HMRC scrutiny. Clear communication with contractors is essential to maintaining trust and avoiding losing talent to competitors who are willing to handle IR35 more thoughtfully.
Practical steps include:
- Commissioning independent status reviews
- Keeping written evidence of each determination
- Regularly reviewing contracts for control, substitution, and mutuality of obligation clauses
- Training hiring managers on IR35 compliance
Above all, getting expert advice can reduce risks, minimise liabilities, and give your business the confidence to continue using flexible workers.
Why expert advice matters
IR35 remains one of the most complex and controversial areas of tax compliance for contractors and businesses alike. The rules aren’t just hard to follow; they’re actively shaping how, where, and whether work happens. However, while the policy environment remains uncertain, expert guidance can make a critical difference.
The path forward may be complex, but there are still clear steps contractors and businesses can take to protect their future. Those who act early, seek advice, and stay proactive, will be best placed to succeed in an evolving market.
At Wilkins Southworth, we help individuals and businesses untangle IR35, offering tailored advice that cuts through the confusion and focuses on practical solutions. Whether you’re worried about your status, facing an HMRC enquiry, or planning ahead for your contracting or hiring strategy, we’re here to help.