Labour’s government is under increasing scrutiny because it places restrictions on business, despite plans for growth. Dave Chaplin examines the off-payroll rules and single worker status, as well as contractor employment.
The government is faced with a difficult economic problem: how to stimulate the economy while also tackling a large fiscal deficit.
It must balance its ambitious spending plans with financial constraints.
Despite its focus on economic development and pro-business stance, Labour Party seems to be firmly committed in maintaining the off-payroll or IR35 rules.
Labour reaffirmed its position on January 20, 2025, when Treasury Secretary James Murray brought to light the significant financial impact of the rules. The rules generate PS1.8bn per year for the Treasury.
This statement implies that concerns over the impact of legislation on business operations are outweighed by revenue considerations.
Evolution of IR35
The enforcement landscape for IR35 has changed significantly. The Intermediaries Legislation’s (Chapter 8 ITEPA) original tax tribunals, which targeted high-profile journalists in particular, are nearing their end with just a few hearings left.
HMRC is less interested in pursuing legacy cases and instead focuses on enforcing new rules for off-payroll.
HMRC appears to be more pragmatic in its approach to media cases than they were previously.
Compliance checks are usually resolved quickly for organisations that have well-structured processes. Companies with a poor implementation will face long and difficult investigations.
Some companies are tightening up their procedures, whereas others have lifted their blanket bans of limited company contractors. When firms refuse to pay out contractors who are in high demand, they have to pay higher rates.
Future of umbrella companies
The umbrella industry has made progress in its efforts to rid itself of the shark-infested waters that have plagued it for decades. It appears that the days of self-proclaimed accredited firms refusing to pay holiday pay are over.
HMRC continues to play a game of umbrella whack-a mole, adding new names to its public list of tax avoidance schemes and their promoters, facilitators, suppliers, and enablers.
The list is probably not primarily intended to include tax crooks. HMRC is positioning itself correctly to justify the need for new legislation.
The government has gathered evidence that justifies stricter regulations. This culminated in the last Budget announcement by chancellor Rachel Reeves, which stated that new measures were on their way.
The proposed reforms are set to come into effect in April 2026 and aim to eliminate tax avoidance schemes worth approximately PS2.8 billion.
HMRC continues to play a game of umbrella whack-a mole, adding new names to its public list of tax avoidance schemes.
Recruitment agencies will be tasked with ensuring tax compliance as part of the reforms. The agencies are responsible for the correct PAYE deductions and Class 1 NICs as well as apprenticeship levy payment, regardless of any payroll outsourcing arrangements.
The failure of self regulation has led to legislative intervention, despite the resistance from umbrella organisations that want to delay its implementation.
The new framework with its effective transfer of debt to agencies creates a selection process that will only allow for genuine compliant umbrellas and transparent audit trails.
This change will eliminate the practice where umbrella companies get together and use wafer-thin checks to mark their homework, charging high fees for market access.
We need a level playing field that is transparent – this will benefit firms, agencies and contractors.
The new landscape promises to be more transparent, with benefits for all parties – firms, agencies and contractors alike.
Some contractors continue to be concerned about the double National Insurance contribution. However, many have adjusted their pricing strategies according to employment models.
Also, umbrella companies that are reputable can help with tax-efficient mechanisms such as pension contributions.
HMRC appears to have run out of patience. This regulatory overhaul is a major step towards industry-wide compliance. The legislative momentum seems unstoppable. This suggests that the future of umbrella firms will be defined through transparency and strict compliance with tax regulations.
Employment Rights Bill
The Government’s Employment Rights Bill will protect vulnerable workers against job insecurity. This includes those who are on zero-hours contracts, despite having regular work patterns.
The bill has laudable intentions to protect the rights of workers. I am concerned that its implementation will be a major problem and riddled by technical flaws, which could cause more problems than the bill solves.
I also believe that it is based upon ideologically one-sided thinking. This is ironic, considering the essence of the bill is to overcome issues with so-called “one sided flexibility”, a polite term meaning exploitation.
The government wants to grow, but this bill shows a lack of understanding of how businesses operate. I think that the not-oven ready bill needs to be redrafted and is currently being passed through Parliament.
Status of single worker
The UK’s framework for employment status presents many challenges, especially in the treatment it receives under tax and employment law.
The current system of rights for employee, worker, and self-employed is ineffective. Individuals often require extensive legal support, and union backing, to secure their rights, which can be costly and time-consuming.
Tax law’s binary classification of self-employed or employed workers further complicates the situation.
The misalignment can lead to a “zero rights employment” scenario, where people are taxed like employees but lack employment rights.
It is especially evident in IR35 situations, where “deemed” employees are subject to full employment taxes without receiving any benefits – a situation which contradicts the principles for fair employment protection.
Labour’s promise to implement single worker status was a simple solution, but it has run into practical difficulties. The seemingly simple solution was abandoned after a closer look at its complexity.
Due to the complexity of the reform of the employment status and its wide-ranging implications, it is unlikely that there will be any significant changes during this parliamentary session and perhaps beyond. This issue may be relegated to the pile of problems that are too complex to solve.
Campaign promises
Labour’s recent policy changes, including unexpected increases to employers’ NI contributions, winter fuel allowance clawbacks and manifesto commitments have made it difficult to predict future actions.
If the party fails to achieve significant economic growth by the next general elections, it could face serious electoral challenges coming from the combined Conservative Party and Reform Party.
Labour’s record of delivering on promises raises doubts about the commitment of their manifesto obligations.
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