HMRC has updated its report on the impact of the 2021 Off-Payroll Working Rules (IR35) reform in the private and voluntary sectors. However, while the Treasury celebrates a £4.2 billion boost in tax revenue, the report continues to sidestep the real issues facing businesses, contractors, and the wider economy.
The headline figures – but at what cost?
The updated report, published in February 2025, estimates that around 120,000 workers have been directly affected by the IR35 reforms. Many of these individuals were deemed employees for tax purposes despite continuing to work through their Personal Service Companies (PSCs). Others abandoned their PSCs altogether, opting for employment contracts with umbrella companies, agencies, or direct employment with clients.
While HMRC boasts of an additional £4.2 billion in tax revenue, it conveniently omits an equally important question: what has been the cost of these reforms to the UK’s flexible workforce, businesses, and the economy?
A predictable HMRC narrative
Unsurprisingly, HMRC’s report presents a self-congratulatory picture. It suggests the majority of organisations adapted easily to the rules, there has been no significant ongoing impact since the reforms were introduced, and only a small number of workers were forced out of contracting. The report also suggests that contractors who moved to payroll-based engagements may not have suffered financially, because some have seen increased pre-tax earnings.
This narrative mirrors HMRC’s previous reports, which have repeatedly downplayed the real-world challenges faced by businesses and contractors. The 2022 version of this report was dismissed as overly simplistic, failing to account for the broader economic context, including the Covid-19 pandemic and the resulting uncertainty in the labour market. The 2025 update does little to address these criticisms.
What HMRC isn’t telling you
The updated IR35 reform impact report includes a new figure, with HMRC estimating that approximately 45,000 fewer PSCs were incorporated as a result of the reform. The decline in PSC formations doesn’t mean people willingly embraced employment status. Rather, it reflects the reality that many businesses have turned away from engaging contractors altogether, unwilling to take on the compliance burden and financial risks associated with the off-payroll rules.
Instead of being absorbed into payrolls at stable rates of pay, many skilled contractors have simply left the UK workforce, moved to overseas clients, or even retired early. HMRC acknowledges that it cannot track what happened to all those affected, but doesn’t seem particularly concerned about finding out.
Meanwhile, businesses have faced rising costs, including employer National Insurance Contributions (NICs), additional compliance obligations, and in many cases, inflated fees paid to umbrella companies and other intermediaries. None of these costs are accounted for in HMRC’s £4.2bn tax windfall calculation.
The myth of ‘easy compliance’
One of the more concerning suggestions in the report is that the majority of organisations found compliance with the off-payroll rules easy. This contradicts the real-life experiences of businesses that have struggled to deal with status determinations, the complexities of HMRC’s CEST tool, the reams of IR35 case law, and the constant risk of liability if they get it wrong.
Many businesses have been forced into blanket determinations, pushing contractors onto payrolls unnecessarily out of fear of non-compliance.
This highlights another glaring omission in HMRC’s report: no detailed analysis of how real businesses have implemented these rules or whether those now paying higher taxes are truly working like “employees”. Instead, the focus remains on broad revenue estimates, without asking whether the system is actually fair or sustainable.
The hidden costs HMRC ignores
A report that only examines tax receipts without considering the wider economic consequences is, at best, incomplete. At worst, it’s a deliberate attempt to justify flawed policy by ignoring inconvenient truths.
If HMRC was truly committed to a comprehensive review, it would have asked:
- How much have businesses actually spent on compliance?
- How many have updated their models to shift the responsibility elsewhere?
- How many contracts have been moved overseas?
- How has the reform affected the availability of skilled contractors in key industries?
- How many contractors have exited the UK labour market altogether?
None of these questions are adequately addressed in the report, and yet, the answers would paint a very different picture from the one HMRC is presenting. Neither are the countless issues raised by oversight bodies such as the Public Accounts Committee, the House of Lords Economic Affairs Committee, the National Audit Office and the Office of Tax Simplification.
A fair and proportionate system?
HMRC insists that its evaluation of the reform has been ‘proportionate and transparent‘. However, this contradicts the experiences of businesses facing compliance crackdowns, contractors forced onto payroll, and the growing fear of HMRC’s aggressive enforcement approach.
Even more troubling is HMRC’s assertion that it sees no need to publish further updates to this analysis. Perhaps because further scrutiny would reveal the long-term damage done to the UK’s contractor workforce.
Meanwhile, contractors have lost autonomy, businesses have lost access to flexible talent, and the UK economy has lost a key competitive advantage in the global market.
Where do we go from here?
With no further updates planned, HMRC appears content to close the book on IR35 reform. However, businesses and contractors cannot afford to be complacent.
The reality is that, while HMRC may consider the reforms settled, organisations still bear the full burden of compliance. Businesses must continue to conduct robust status determinations, maintain compliance records, and ensure they are meeting their obligations. Please get in touch if you need support.
