IR35: Why Scrapping the Legislation Isn’t the Silver Bullet Reform UK Thinks It Is

Calls to scrap IR35 entirely have resurfaced, most recently from figures associated with Reform UK and its ‘Restore Britain’ messaging. The argument is simple and politically attractive: IR35 is unpopular, complex and widely criticised, so let’s abolish it!

For many contractors frustrated by blanket determinations and risk-averse hirers, that message will resonate. But while IR35 reform is long overdue, outright abolition without a viable alternative would create significant tax, compliance and labour market problems. The reality is more nuanced: the UK needs a better system, not a vacuum.

 

What IR35 Was Designed to Do

Introduced in 2000, IR35 was created to tackle what HMRC calls ‘disguised employment’, situations where individuals work like employees but supply their services via a limited company to reduce tax and look to increase take home pay.

In simple terms, the rules aim to ensure that:

• Contractors working like employees pay broadly similar Income Tax and National Insurance as employees
• Employers cannot avoid employer’s National Insurance Contributions (NICs) simply by engaging individuals through personal service companies (PSCs).

Whatever one’s political view, the underlying issue, tax arbitrage between employment and self-employment , is real. Abolishing IR35 would not remove that structural imbalance. It would amplify it and create a bigger set of problems.

 

The 2017 and 2021 Reforms

The off-payroll reforms shifted responsibility for determining IR35 status:

• In 2017 for the public sector
• In 2021 for the private sector.

Under these changes, medium and large sized end-clients (as defined by HMRC), not the contractor, must assess the IR35 status of an engagement and if it falls inside or outside IR35.

The practical result?

• Risk-averse businesses
• Blanket inside IR35 determinations
• Growth in umbrella company use
• A chilling effect on genuinely independent contracting
• IR35 insurances overlooked by the fee-payer.

Critics, including many within the contractor community, argue the reforms distorted the market and unfairly penalised flexible workers. They are right to highlight these problems. But that does not mean scrapping the entire framework is workable.

 

Why Simply Abolishing IR35 Won’t Work

If IR35 disappeared tomorrow without replacement, three immediate issues would arise:

 

1. A Major Tax Gap

Employees pay Income Tax and employee NICs. Employers also pay employer NICs. Contractors operating via PSCs can extract income through dividends, reducing NIC liability.

Remove IR35 and you reintroduce a strong financial incentive for organisations to:

• Reclassify workers as contractors
• Avoid employer NICs
• Reduce employment protections.

The Treasury would face a significant revenue shortfall – and it would almost certainly respond with new legislation. And that would bring us right back to where we started.

 

2. Increased False Self-Employment

Before IR35, there were widespread concerns about ‘Friday to Monday’ arrangements. This is where employees leave on a Friday and return on a Monday as contractors doing the same job.

Without a regulatory backstop, labour market distortion would likely return, especially in sectors under cost pressure. Businesses compete on margins. If one firm saves the Employers NI on labour by using PSCs, others would follow. That is not a sustainable employment model.

 

3. Unresolved Structural Tax Imbalance

The deeper issue is the UK’s uneven tax treatment of labour. IR35 is effectively a sticking plaster over this imbalance. Remove the plaster without addressing the wound, and the same incentives will resurface.

 

The Political Appeal vs Economic Reality

From a campaigning perspective, pledging to scrap IR35 is smart politics. Contractors are a vocal group. The rules are complex and unpopular. By shouting about ‘IR35 abolition’ gives off a good sound bite and sounds decisive.

But tax policy cannot operate in isolation from fiscal reality. The UK runs persistent budget deficits. Any party proposing to remove IR35 would need to explain:

• How lost employer NIC revenue would be replaced
• How disguised employment would be policed
• Whether employment taxes would be restructured entirely.

So far, there has been little detail on what would replace the regime. In fact, pretty much nothing.

 

What Would Work Instead?

Rather than abolition, reform should focus on structural simplification. A viable alternative could include:

 

1. Aligning Taxation of Labour

The long-term fix would be narrowing the gap between employment and self-employment taxation. This could mean:

• Reforming employer NICs
• Introducing a flatter, more neutral labour tax system
• Shifting taxation away from employment status entirely.

Without equalising incentives, avoidance will always find a route.

 

2. Returning Determination Responsibility – With Safeguards

Many contractors argue that status decisions should return to contractors themselves, but with:

• Clear statutory tests
• Stronger penalties for misclassification
• Independent dispute resolution.

This would reduce blanket determinations while preserving anti-avoidance controls.

 

3. Safe Harbour Rules

HMRC could introduce objective ‘safe harbour’ criteria, for example:

• Multiple concurrent clients
• Financial risk borne by contractor
• Substitution genuinely exercised.

Clear, objective markers would reduce uncertainty and compliance costs.

 

4. Targeted Enforcement

Instead of broad, risk-shifting reforms, HMRC could focus enforcement on:

• Obvious employment-in-disguise models
• Artificial arrangements
• Large scale avoidance schemes.

That approach would protect revenue without distorting the wider contracting market.

 

Contractors Deserve Better – But So Does Policy

There is no doubt IR35 has caused disruption, particularly since the off-payroll reforms. Many genuine contractors feel unfairly treated. Businesses have faced increased compliance burdens. The umbrella market has expanded in problematic ways.

But scrapping IR35 without a replacement would not create a fairer system. It would create a tax and employment imbalance that policymakers would inevitably have to correct, likely with even more complex rules.

The UK needs a comprehensive review of how labour is taxed. Until that happens, IR35, flawed as it is, remains a mechanism to manage a structural problem.

The real debate should not be ‘scrap or keep’ it should be:

How do we design a system that supports genuine entrepreneurship, protects the tax base, and removes artificial incentives around employment status?

Abolition may be politically attractive. Sustainable reform is economically necessary.