IR35, Umbrella Reform & the £4.2bn Wake-Up Call: A New Era for Contractor Payroll and Compliance
Chris Dunn, Managing Director, OPRAAS
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.
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