The Labour government has come under increased scrutiny for placing constraints on businesses, despite its plans for growth. Dave Chaplin looks at the landscape for off-payroll rules, single worker status and contractor employment.

The government faces a daunting economic puzzle: how to stimulate growth while addressing a significant fiscal deficit.

With promises to boost investment, reform business rates, and modernise the workforce, it must balance ambitious spending plans against financial constraints.

IR35 and worker status

IR35: social worker wins case over national insurance payments 

IR35: one in five highly-skilled contractors not working

Despite its pro-business stance and focus on economic growth, the Labour Party appears firmly committed to maintaining the off-payroll rules, or IR35.

Labour reinforced its position in January 2025 when Treasury Secretary James Murray highlighted the rules’ significant financial impact, generating £1.8bn annually for the Treasury.

This statement suggests that revenue considerations outweigh concerns about the legislation’s effect on business operations.

Evolution of IR35

The landscape of IR35 enforcement has evolved significantly. The original tax tribunals under the Intermediaries Legislation (Chapter 8 ITEPA), which primarily targeted high-profile media personalities, are now drawing to a close with only a few hearings remaining.

HMRC has shown diminishing interest in pursuing these legacy cases, instead shifting its attention to enforcing the new off-payroll rules.

Encouragingly, HMRC’s approach to compliance under the new framework appears more pragmatic than their previous handling of media cases.

Organisations that demonstrate well-structured compliance processes typically experience swift resolution of compliance checks. However, companies with poor implementation face lengthy, challenging investigations.

Prudent organisations are tightening their processes, while some companies have removed their blanket bans on limited company contractors. Where firms insist on payroll only for in-demand contractors, they face paying higher rates to offset these restrictions.

Future of umbrella companies

Efforts to dredge the umbrella industry’s historic shark-infested waters have made gains. The days of self-styled accredited firms withholding holiday pay appear behind us.

HMRC’s game of dodgy umbrella whack-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.

The evidence gathered has provided the government with a compelling justification for stricter regulation, culminating in chancellor Rachel Reeves’ last budget announcement that measures are on the way.

The proposed reforms, set to take effect from April 2026, aim to eliminate approximately £2.8 billion in tax avoidance schemes.

HMRC’s game of dodgy umbrella whack-a-mole continues, with new names regularly added to their public list of named tax avoidance schemes.”

A key aspect of these reforms will see recruitment agencies become tax compliance enforcers. Agencies are expected to bear responsibility for ensuring proper PAYE deductions, Class 1 NICs, and apprenticeship levy payments, regardless of payroll outsourcing arrangements.

Despite resistance from umbrella trade organisations seeking to delay implementation, the evident failure of self-regulation has made legislative intervention inevitable.

The new framework, featuring effective debt transfer to agencies, creates a natural selection process where only genuinely compliant umbrellas with transparent audit trails will remain viable.

This shift will likely eliminate the practice of umbrella companies getting together using wafer-thin “checks” to mark their own homework and charging high fees to secure market access.

We should see a fully transparent level playing field – good for firms, good for agencies, and good for contractors.

The emerging landscape promises a more transparent industry, benefiting all stakeholders – from firms and agencies to contractors themselves.

While some contractors may continue to express concerns about dual National Insurance contributions, many have adapted by adjusting their pricing strategies based on employment models.

Additionally, reputable umbrella companies can assist with tax-efficient mechanisms like pension contributions.

This regulatory overhaul represents a decisive move toward industry-wide compliance, with HMRC’s patience seemingly exhausted. The legislative momentum appears unstoppable, suggesting that the future of umbrella companies will be defined by transparency and strict adherence to tax regulations.

Employment Rights Bill

The government’s forthcoming Employment Rights Bill aims to protect vulnerable workers from job insecurity, particularly those on zero-hours contracts despite regular work patterns.

The bill shows a laudable ambition to protect workers’ rights. Still, I fear its implementation is deeply problematic and is riddled with technical shortcomings that could create more problems than it solves.

Moreover, I believe it is based on ideological one-sided thinking, which is ironic considering the bill’s essence is to overcome the issues of so-called “one-sided flexibility” – a polite word meaning exploitation.

The government wants growth, but with this bill, we are witnessing a profound lack of practical understanding of business operations. The not-oven-ready bill is passing through Parliament and needs considerable redrafting, in my view.

Single worker status

The UK’s employment status framework presents significant challenges, particularly in its divergent treatment under employment rights and tax law.

The current three-tier system for rights of employee, worker and self-employed has proven ineffective, with individuals often requiring extensive legal support and union backing to secure their entitled rights through lengthy, costly proceedings.

The situation is further complicated by tax law’s binary classification of someone being either employed or self-employed.

This misalignment creates the problematic scenario of “zero-rights employment” where individuals may be taxed as employees while lacking corresponding employment rights.

This is particularly evident in IR35 cases, where “deemed employees” face full employment taxation without receiving any associated benefits – a situation that contradicts the principles of fair employment protection.

Labour’s initial campaign promise of implementing single worker status as a straightforward solution has encountered practical difficulties. This seemingly simple fix was shelved upon a deeper examination of its complexities.

Given the intricate nature of employment status reform and its far-reaching implications, substantial changes appear unlikely during the current parliamentary term and possibly beyond. It may simply be put back in the pile of things that are too difficult to solve.

Campaign promises

Labour’s recent policy shifts, including unexpected increases in employers’ NI contributions and winter fuel allowance clawbacks, have undermined their manifesto commitments and made future actions challenging to predict.

Without achieving significant economic growth before the next general election, the party could face serious electoral challenges from a combined Conservative and Reform Party opposition.

While pre-election periods typically present opportunities for policy influence through campaign promises, Labour’s track record on delivering pledges raises questions about their commitment to manifesto obligations.

 

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