Recent legislative changes and further clarity on IR35 rules in the Courts have highlighted that working ‘outside IR35’ may not now be just for the few. A closer look at how things have changed and the current state of the temporary labour market may provide opportunities for contractors, agencies and clients alike.
The background
Tax changes introduced by the Off-Payroll Working (OPW) rules introduced in 2017 and 2021 saw a massive move away from limited company contractor engagements.
The temporary labour market saw substantial end-clients, many in the banking and IT sector, opt for a blanket ban on contractors rather than risk being caught by the financial downside of getting status determinations wrong.
The consequent shift to ‘inside IR35’ roles and rise in the numbers of contractors working through umbrella companies changed the contracting landscape dramatically.
Against a backdrop of uncertainty created by wildly different tax tribunal decisions interpreting matters such as ‘control’ and ‘mutuality of obligation’, agencies, end-clients and contractors saw themselves in a no-win situation. The entrepreneurial side of contracting became more constrained, agencies were pitched into using the most risk-averse solutions whilst end-clients stuck to what they saw as being the safest haven.
Evolution of risk and opportunity
When the OPW legislation was introduced it was seen by HMRC as a simpler, more efficient and frankly, cheaper way in which to stop the haemorrhaging of tax and NICs from a significant number of personal service companies ignoring the IR35 rules.
What HMRC probably didn’t reckon on, as the market for umbrella company providers grew to accommodate the expanding demand, that they were creating an opportunity for bad actors to enter the stage. Unscrupulous umbrella companies entered the marketplace offering illegitimate tax avoidance schemes and defaulting on payments of tax and NICs leaving contractors to pick up the bill.
Tax cases based on the fundamental legal issues of employment status and the consequent inside/outside IR35 issue rumbled on through the courts. Meanwhile in the new age of end-user IR35 status determinations we saw a concession to fairness in the HMRC offset legislation in 2024. This ensures that the tax consequences of getting a status determination wrong now considers a deduction of the tax/NICs already paid by a contractor from the amount owed by the hiring organisation.
The current state of play
The arrival from April 2026 of the new umbrella company legislation bringing in Joint and Several Liability (JSL) has introduced potential future jeopardy for unwary agencies, contractors and end -clients alike. HMRC can now go up the supply chain to an agency and even end-client to recover unpaid PAYE and NICs from a defaulting umbrella company.
The JSL approach from HMRC was anticipated and is a step at regulating the umbrella market. The expectation is that responsible agencies who continue to use umbrella providers will exercise effective due diligence in choosing their provider.
For persons looking at the options of seeking to work outside IR35, or of end clients looking to recruit such contractors, the recent PGMOL tax case decided in the Supreme Court doesn’t give unfettered encouragement to all. What it does do, though, is set out some clear rules on the framework of control and mutuality allowing contracts to be drawn up with the confidence of knowing how the Courts will interpret them if questioned by HMRC.
Going forward
Our industry operates in a fast- moving environment. It has to deal with complex and changing legislation, it has commercial and financial imperatives and needs to be responsive to conflicting demands in a competitive world.
We know that HMRC’s drive will always be towards protecting the revenue and pushing for high levels of due diligence and compliance amongst the players in the sector.
IR35 has not changed but the world around has. There is now an opportunity to persuade those end-clients who have insisted on a blanket ban on contractors to take off their blinkers. Perhaps they need to reconsider in this competitive environment that ‘outside IR35’ is possible and with the right support and advice, the risks can be substantially reduced.
We may be some way from seeing a rush back to ‘outside IR35’ engagements. However, effective on-boarding procedures, off-payroll checks and detailed IR35 reviews supported by partner organisations such as PayStream can provide comfort and security for those wanting to take a closer look at this option.
