With the new year underway, several factors will shape the sector in 2025 and beyond, with regulatory changes and political pressures creating challenges and opportunities. Key developments include:
- IR35 legislation remains entrenched: Treasury valuing it at £1.8bn annually, though we see more companies confidently engaging contractors "Outside IR35" through improved assessment processes.
- Umbrella company regulation inevitable: New legislation targeting the £2.8bn tax avoidance problem through increased agency accountability and stricter oversight
- Employment Rights Bill faces significant hurdles: It will impact flexible working arrangements whilst aiming to protect vulnerable workers, but it may impede growth.
- Single Worker Status: Reforms unlikely, despite Labour's pre-election promises, as the complexity becomes apparent
- Labour juggles competing priorities: Drive economic growth while aiming to balance the UK budget.
In 2025, businesses must handle IR35 compliance and adapt to heightened scrutiny.
IR35 & Off-payroll - Predictions
From a legislative perspective, there is zero chance of the Labour Party repealing the off-payroll rules. Despite Labour claiming to be pro-business and desperate for growth, they appear blind to the business friction IR35/Off-payroll puts on business. Responding to a Treasury question in January 2025, James Murray, Exchequer Secretary (HM Treasury), indicated that the Treasury views off-payroll as a £1.8bn a year earner.
The IR35 tax tribunals are ending based on the original rules (Intermediaries Legislation, Chapter 8 ITEPA), which mainly involved high-profile media people, with less than a handful of hearings left. Based on my experience working on many media cases (most of which were resolved last year without the need to go to tribunal), HMRC's appetite for litigating these old cases is extremely low. HMRC's focus is on the new rules off-payroll.
The positive news is that HMRC's compliance officers under the new rules appear to be taking a much less aggressive approach than those involved in the media cases. In our experience, where firms can demonstrate good processes, the checks close relatively quickly. The problematic ones, which can be time-consuming, are where firms have made a mess of the implementation.
Many firms have been addressing their processes in light of the HMRC compliance checks. They are moving away from using HMRC's outdated Check Employment for Tax (CEST) tool and using firms (like IR35 Shield – yes, blatant plug) that can offer a more robust solution and consultancy.
Whilst many firms have revisited and lifted their blanket bans of limited company contractors, some still insist on payroll-only, and savvy contractors are charging increased rates to accommodate them.
Umbrella Companies – only the compliant should survive
The journey to clear up the umbrella industry's historic shark-infested waters has made gains. The days of self-styled accredited firms withholding holiday pay, as reported by the BBC, appear to be behind us. HMRC's game of dodgy-umbrella wac-a-mole continues, with new names regularly added to their public list of "named tax avoidance schemes, promoters, enablers and suppliers."
Tax crooks don't care about being added to this list, but that's probably not the list's primary purpose. HMRC is rightly positioning itself to justify why new legislation is needed, and the list has given them everything they need.
The Chancellor, Rachel Reeves, announced reform plans in her first budget, estimated to shut down around £2.8bn of avoidance. From April 2026, the new rules seek to turn recruitment agencies into the umbrella tax police. As Bird and Bird report: "Recruitment agencies will be obliged to take responsibility for ensuring PAYE, Class 1 NICs and apprenticeship levy are correctly deducted and accounted for to HMRC. This will be the case even if they outsource payroll functions."
Whilst there is much bleating from umbrella trade bodies that seek to delay the reforms, the reality is that attempts at self-accreditation have not worked well enough. We are now in legislative juggernaut mode, and it will proceed without consultation. As a veteran campaigner, I see no viable route to thwarting the inevitable. HMRC appears to have lost their patience.
With effective debt transfer to agencies, only fully compliant and transparent brollies (with independent audit trails for every penny will survive) - otherwise, why would agencies touch them? The new way will be the compliant way.
With independent umbrella auditing firms already well-established, I anticipate moving away from groups of umbrellas banding together, using wafer-thin "checks" to mark their own homework, and charging hefty fees to provide access to the market. We should be back to a fully transparent level playing field – good for firms, good for agencies, and good for contractors.
There will still be contractors frustrated at appearing to pay both sets of national insurance contributions. Still, the savvy ones have worked out how to quote differently depending on the model, and good umbrellas can also assist with tax-efficient mechanisms like pension contributions.
Employment Rights Bill
One of Labour's flagship bills is the new Employment Rights Bill, passed before Parliament in October 2024 and is currently making its way through various stages. At the time of writing, the Bill is at the report stage and is due to be finished on 21 Jan 2025.
The intentions of the Bill are admirable, and it seeks to support vulnerable, low-paid workers who get stuck on zero-hours contracts (despite working regular hours), leaving them in perennial job insecurity.
But, in my view, the current draft is dreadful and unworkable. If enacted, it could put a severe brake on economic growth. Labour has a big dilemma on its hands.
Single Worker Status
In the UK, employment status for rights purposes is a mess – the "Worker" status hasn't really worked, with many individuals having to secure backing from large law firms and unions to seek the rights they should be getting. Cases take years and cost a fortune, and the problem needs fixing. The 3-status system of Employee, Worker or Self-Employed isn't working.
Further complications arise because there are just Employees and Self-employed under tax law, and being categorised in tax as an employee doesn't automatically mean the same status for rights – the dreaded "Zero-Rights Employment." Under IR35 rules, "deemed employees" get no rights at all despite being taxed like employees - the antithesis of the purpose of the Employment Rights Bill, which is to remove one-sided flexibility. That cannot be right.
In my view, Labour took a rather populist approach to this issue during its election campaign – claiming they would solve the complex problem by introducing a simple solution – "Single Worker Status." However, the idea was shelved once Labour went further than soundbites and drilled down into the complex web of status. I don't see it happening in this Parliament, perhaps not even the next.
Budgets, Politics and Taxes
Given that the Labour Party breached its manifesto by increasing Employers NI and introducing other surprises, like clawing back the Winter Fuel Allowance, it would take a brave commentator to claim they know what's coming next firmly.
Labour does have a huge problem, though. It's painted itself into a corner by raising taxes even though it said it would not and may raise them again. If they do not get growth a year before the next General Election, it seems likely that the combined popularity of the Conservatives and Reform will pose a considerable threat.
When General Elections approach, that's the best time to campaign because if you have the numbers, parties will promise anything to try and gain or retain power. Labour pledged to review the Loan Charge Scandal – another thing that hasn't happened yet.
Dave Chaplin is CEO of ContractorCalculator and tax compliance firm IR35 Shield, which assists firms with IR35 assessments and HMRC IR35 compliance checks. He is the author of IR35 & Off-Payroll Explained.