IR35, Umbrella Reform & the £4.2bn Wake-Up Call: A New Era for Contractor Payroll and Compliance

July 22, 2025

In March 2025, HMRC revealed IR35 reforms have generated an additional £4.2bn since 2021, signalling a new era of accountability and enforcement. With further structural changes ahead—targeting umbrella companies and introducing guaranteed hours for agency workers—businesses must urgently reassess contractor compliance strategies.

In March 2025, HMRC confirmed that reforms to IR35 have delivered a staggering £4.2 billion in additional tax revenue since being extended to the private sector in April 2021. While some may interpret this as proof of policy success, those of us supporting contractor engagement and payroll compliance know what it truly signals: we are now in a new era of accountability, transparency and enforcement.

This figure is not just a headline — it’s a clear and quantifiable reminder that off-payroll working rules are here to stay, and that non-compliance is being penalised. But if IR35 was the opening act, the next two years promise a broader and more structural reform of how flexible labour is engaged across the UK. From tighter regulation of umbrella companies to new agency worker rights, the landscape for end-hirers, recruitment firms and intermediaries is shifting fast — and permanently.

Read the original article on Accountancy Age

The IR35 Enforcement Reality: Real Money, Real Risk

Between April 2021 and March 2022 alone, nearly 45,000 fewer personal service companies (PSCs) were incorporated. More than 280,000 contractors have since moved into employment or umbrella models — often due to risk-aversion from clients or agencies unsure how to correctly apply status determinations.

HMRC’s data tells us:

Over 120,000 contractors have been reclassified under IR35
£1.3bn in tax was raised in the last tax year alone
End-hirers and agencies are now the primary targets of compliance checks

The reforms fundamentally shifted liability from the worker to the engager. This includes:

The obligation for end-clients to determine IR35 status accurately
A requirement for agencies to ensure workers are paid in line with that determination
Financial penalties if incorrect assessments or non-compliant models are used

At OPRAAS, we’ve worked with a growing number of clients to migrate away from legacy models toward a PEO-led approach, where tax compliance, payroll, and legal responsibility are managed within one auditable, indemnified solution.

Reform 2.0: What’s Coming for Umbrella Companies and Agencies

The government has signalled a second phase of reform, this time targeting the regulatory gaps around umbrella companies, agency labour, and intermediaries.

Over the next 18–24 months, three major changes are anticipated:

1. Guaranteed Hours for Agency Workers

Legislation is being drafted to give zero-hours agency workers the right to guaranteed hours and notice of shift cancellations, potentially after a 12-week qualifying period. This raises important questions for hirers: Will this shift legal responsibility from agency to end-client? If so, staffing models will require structural rethinking to remain compliant and commercially viable.

2. Umbrella Companies to Face Direct Regulation

For the first time, umbrella companies will fall under recruitment legislation. They’ll be legally required to:
Pay workers even if the agency hasn’t reimbursed them
Stop charging workers for payroll services
Meet rigorous standards around transparency and tax compliance

Perhaps more significantly, staffing agencies will become jointly liable if the umbrella companies they partner with fail to make correct PAYE and National Insurance deductions. This is a major departure from the status quo — and one that should prompt immediate due diligence across your umbrella supply chain.

3. Creation of the Fair Work Enforcement Body

A new regulator, the Fair Work Agency, will merge the powers of the GLAA, HMRC’s minimum wage team, and the Employment Agencies Standards Inspectorate. This body will have consolidated authority to investigate, audit and prosecute across labour supply chains, giving enforcement real teeth.

From April 2026: The End of the “Umbrella Buffer” Myth

Possibly the most consequential change comes into force in April 2026. At that point, any agency placing a worker will be responsible for ensuring PAYE compliance — regardless of whether an umbrella company is used. This spells the end of the belief that placing a worker via an umbrella company somehow protects agencies or hirers from tax liabilities. It doesn’t — and from 2026, it can’t.

In preparation, we’re already seeing many recruitment firms and MSPs moving away from outsourced payroll providers and exploring more robust, compliant solutions such as PEO models. At OPRAAS, our platform was built precisely for this need.

Practical Actions: What Agencies and Hirers Should Do Now

With changes already underway and more on the horizon, here’s how your organisation can prepare:

1. Audit Your Current Arrangements

Review every off-payroll and umbrella engagement. Can you:

Evidence IR35 assessments with audit-ready documentation?
Validate the tax compliance of your umbrella partners?
Demonstrate due diligence in your supply chain?

2. Review and Update Your Contracts

Ensure you’ve got the right indemnities, clauses, and frameworks in place to protect against retrospective liabilities — especially if your contracts reference old legislation or assumptions.

3. Consider a PEO Model

OPRAAS acts as the contractual and legal employer of your contractors, managing payroll, tax deductions and compliance on your behalf. We offer:

Full indemnity
HMRC-aligned tax practices
End-to-end engagement visibility
Contractor care and continuity

This gives you compliance without complexity, preserving the flexibility of your contingent workforce while protecting your brand and bottom line.

The Bigger Picture: A Shift Towards “Accountable Engagement”

The £4.2bn generated through IR35 enforcement isn’t just a tax line — it’s a warning shot. It demonstrates that labour supply chains are being actively audited, and that recruitment agencies and end-hirers can no longer delegate risk to third-party intermediaries. In truth, we are entering an age of “accountable engagement” — where the businesses that engage contractors are also expected to understand, manage, and evidence that those engagements are lawful, fair and taxed correctly.

This doesn’t need to be a burden. With the right partners, systems and support, compliance can become a competitive advantage, not just a risk to be managed.

Final Thoughts: Preparing Today for the Rules of Tomorrow

The message from HMRC is unambiguous: off-payroll working compliance is no longer optional. And with major reform of umbrella companies and labour supply chains now confirmed, the next two years will define which organisations are ready — and which are not.

At OPRAAS, we’ve spent years helping agencies and hirers simplify contractor compliance, eliminate ambiguity, and future-proof their payroll strategies. If you’re ready to de-risk your contingent workforce and stay ahead of reform, we’re ready to help.

Contact Us:

info@opraas.co.uk

01625 900744

Read the full Accountancy Age article here

Acronym	Full Term	Definition
CFA 2017	Criminal Finances Act 2017	UK legislation introducing Corporate Criminal Offence (sections 45/46): failure to prevent the facilitation of tax evasion. Requires businesses to implement 'reasonable prevention procedures' (RPP). The only defence is having adequate RPP or showing it was not reasonable to expect such procedures.
MSA 2015	Modern Slavery Act 2015	UK legislation mandating supply chain transparency and worker safeguarding. Section 54 requires commercial organisations with ≥£36m turnover to publish annual modern slavery statements (board-approved, signed by director, published on website with prominent homepage link).
IR35	Off-Payroll Working Rules	Tax legislation determining whether a contractor should be treated as employed or self-employed for tax purposes. Since April 2021, medium and large private sector clients must determine contractor status and deduct employment taxes if inside IR35. Requires Status Determination Statement (SDS).
JSL	Joint & Several Liability	2026 legislation imposing strict liability on agencies and end-hirers for umbrella company tax debts, even where due diligence checks have been undertaken. Makes supply chain participants jointly responsible for unpaid PAYE taxes.
AWR	Agency Workers Regulations 2010	UK regulations giving agency workers the right to the same basic working and employment conditions as permanent employees after 12 weeks in a qualifying assignment (12-week parity rule).
Good Work Plan	Good Work Plan 2020	UK employment law reforms requiring written 'section 1 statement' of employment particulars to be given to employees and workers on or before day 1 of engagement (effective 6 April 2020). Sets out key terms but is not itself the contract.
Construction Act	Housing Grants, Construction and Regeneration Act 1996	UK legislation governing payment practices in construction contracts. Section 113 renders "pay when paid" clauses ineffective (except where upstream payer is insolvent). Requires clear due dates, final dates for payment, and compliant payment/pay less notices.
Pensions Act 2008	Pensions Act 2008	UK legislation establishing workplace pension auto-enrolment requirements. Employers must automatically enrol eligible workers into qualifying pension schemes and make minimum contributions.

Acronym	Full Term	Definition
HMRC	HM Revenue & Customs	UK government department responsible for tax collection, payment of tax credits and benefits, and enforcement of tax law. Operates PAYE, CIS, RTI systems and conducts compliance audits. Business Tax Account provides reconciliation data.
GLAA	Gangmasters and Labour Abuse Authority	UK government body regulating labour providers in certain sectors (agriculture, horticulture, shellfish gathering, food processing/packaging) and investigating worker exploitation. Operates licensing regime and has criminal investigation powers. Hotline: 0800 432 0804 (03000 718234 out of hours).
ICO	Information Commissioner's Office	UK independent authority upholding information rights. Enforces UK GDPR and Data Protection Act 2018. Personal data breaches must be reported to ICO within 72 hours where there's risk to individuals' rights. Provides guidance on lawful bases, DSARs, and data-sharing.
CITB	Construction Industry Training Board	Industry body that collects levy from construction employers (payroll ≥£80k in PAYE in last tax year, or ≥£80k net CIS payments) and provides training grants. CITB levy compliance is audited in construction-focused compliance audits.

Acronym	Full Term	Definition
PAYE	Pay As You Earn	HMRC's system for collecting Income Tax and National Insurance Contributions from employees' wages. Employers deduct tax before paying employees, then remit to HMRC. Operates under Real Time Information (RTI) reporting requirements.
CIS	Construction Industry Scheme	Tax deduction scheme for payments to subcontractors in construction industry. Contractors must verify subcontractors with HMRC before first payment and make deductions (20% for verified, 30% for unverified) on labour element only (excluding VAT and allowable materials). CIS300 returns due by 19th following tax month.
GPS	Gross Payment Status	CIS status allowing subcontractors to be paid without deductions. Must apply to HMRC and meet compliance tests (business test, turnover test, compliance test). Contractors must verify GPS and keep evidence; continue to file CIS300 but make no deduction.
CIS300	CIS Monthly Return	HMRC return submitted by contractors detailing total payments made to each subcontractor and CIS tax deductions applied. Must be filed by the 19th following the tax month (6th–5th). Should reconcile to subcontractor statements and bank payments.
CIS340	CIS340 Guidance	HMRC's official guidance document defining what constitutes 'construction operations' for CIS purposes. Only work qualifying under CIS340 can legitimately be paid through the Construction Industry Scheme. Includes site preparation, construction, alteration, repairs, demolition.
RTI	Real Time Information	HMRC system requiring employers to report PAYE information at or before each pay run. Consists of Full Payment Submission (FPS) for regular pay data and Employer Payment Summary (EPS) for adjustments/recoveries. Must reconcile to payslips and Business Tax Account.
FPS	Full Payment Submission	RTI submission reporting gross taxable pay, Income Tax, and NICs for each employee on each payday. FPS values must match payslips. Should not be used to mask under-deductions.
EPS	Employer Payment Summary	RTI submission used only for adjustments, such as recoveries, statutory payments, employment allowance claims, or apprenticeship levy. Should not be used to mask PAYE under-deductions.
Bacs	Bankers' Automated Clearing Services	UK electronic payment system used for direct debits and credits, including salary payments. Net pay on payslip must match Bacs transfer to worker's bank account. Never use "BACS" (incorrect).
UTR	Unique Taxpayer Reference	10-digit number issued by HMRC to identify individuals and businesses for tax purposes. Required for CIS verification and self-assessment tax returns. Note: UTR alone isn't proof of CIS verification; contractor must verify with HMRC before first payment.
NIC / NICs	National Insurance Contributions	UK social security tax paid by employees (via PAYE), employers (as on-costs), and the self-employed (Class 2/4 via self-assessment). Funds state benefits including state pension, statutory sick pay, and maternity allowance. CIS deductions are payments on account of Income Tax and Class 4 NICs.
NMW	National Minimum Wage	Legal minimum hourly rate employers must pay workers in the UK. Rates vary by age band. Post-deduction pay (after deductions for employer's own use/benefit) must not fall below NMW. Records must be kept for 6 years.
NLW	National Living Wage	Higher rate of National Minimum Wage for workers aged 21 and over. Often referred to together as "NMW/NLW". Different from voluntary Real Living Wage calculated by Living Wage Foundation.
AE	Auto-Enrolment (Pensions)	Workplace pension scheme where employers must automatically enrol eligible workers (aged 22+ to state pension age, earning ≥£10k annually) into a qualifying pension. Minimum contributions, opt-out rights, and re-enrolment (every 3 years) required.
P45	P45 (Leaving Employment)	HMRC form given to employees when they leave employment, showing pay and tax details for the year to date. New employer uses P45 to operate correct tax code. Emergency codes (e.g., 1257L W1/M1) apply without P45/P6.

Acronym	Full Term	Definition
DRC	Domestic Reverse Charge (VAT)	VAT mechanism for construction services where the customer accounts for VAT instead of the supplier. Applies to most construction services under CIS340. Designed to combat missing trader fraud in construction supply chains.
Kittel	Kittel Principle	EU/UK legal principle that a taxpayer who knew or should have known their transaction was connected to VAT fraud may be denied the right to deduct input VAT. Creates due diligence obligations for supply chain participants.
DR	Disguised Remuneration	Tax avoidance arrangements designed to pay individuals while avoiding income tax and NICs, often involving loans, offshore entities, or trusts. HMRC actively targets such schemes. Loan charge applies to outstanding loans.

Acronym	Full Term	Definition
SDC	Supervision, Direction or Control	Key factor in determining employment status under agency rules (ITEPA 2003 s44). If a worker is under supervision, direction or control by any person (client, agency, end-hirer) over how they work, PAYE must be operated. SDC alone is not the general CIS status test—apply usual status tests (control, substitution, mutuality).
MOO	Mutuality of Obligation	Employment status indicator examining whether the employer is obliged to provide work and the worker is obliged to accept it. Absence of MOO suggests self-employment; presence suggests employment.
SDS	Status Determination Statement	Document required under IR35 reforms (April 2021) where medium/large clients must provide written reasons for their determination of a contractor's employment status for tax purposes. Must be given before contract starts or worker begins work.
CEST	Check Employment Status for Tax	HMRC's online tool for determining whether a worker should be classified as employed or self-employed for tax purposes. Results are binding on HMRC if information provided is accurate and not relating to highly complex arrangements.
PSC	Personal Service Company	Limited company through which a contractor provides their services. Often used by contractors working outside IR35, but subject to IR35 rules if the underlying relationship is one of employment. Requires SDS from medium/large clients.
KID	Key Information Document	Plain-English factsheet (not a contract) that agencies must give to workers before they agree to an assignment (Conduct of Employment Agencies and Employment Businesses Regulations 2003). Includes worked pay illustration, deductions, who pays the worker, benefits. Must be updated within 5 working days of any change.
ITEPA 2003	Income Tax (Earnings and Pensions) Act 2003	UK tax legislation governing employment income. Section 44 contains agency rules requiring PAYE where worker is under SDC. Section 61N–61R cover off-payroll working (IR35) for public sector and (from 2021) medium/large private sector.
DBS	Disclosure and Barring Service	UK government service providing criminal record checks for employment purposes (particularly roles working with children or vulnerable adults). Processing DBS data requires DPA 2018 Schedule 1 condition and appropriate policy document.