The news that HM Revenue & Customs (HMRC) has collected £1bn more in tax than expected from the 2021 private sector roll-out of the IR35 reforms should not be considered a sign of the initiative’s success, IT contractor market stakeholders claim.
The government tax collection agency published figures in late February 2025 about the impact caused by extending the IR35 reforms to the private sector in April 2021, in terms of how many workers were affected by the changes and how much additional tax HMRC raised by introducing them.
The reforms, introduced as part of HMRC’s ongoing clampdown on disguised employment, were originally rolled out to the public sector from April 2017, and saw contractors cede responsibility to the end-client organisations engaging them for determining whether their work means they should be taxed like an employee (inside IR35) or in the same way as an off-payroll worker (outside IR35).
Several years later, the government announced plans to extend the reforms to medium to large private sector businesses, which – following a 12-month delay due to the Covid-19 coronavirus pandemic – occurred in April 2021.
According to HMRC’s figures, around 120,000 individuals who were providing services through their own limited companies or person service companies (PSCs) were “likely to have been affected” by extending the reforms to the private sector in April 2021.
This includes contractors who may have had their engagements classified as inside IR35 as a result of the changes, and individuals who may have opted to provide their services through an umbrella company since April 2021, confirmed HMRC.
It is worth noting that HMRC originally forecast that the reforms would affect 170,000 individuals, according to a document published on 3 April 2020 that outlined the government’s rationale for rolling out the reforms and the projected benefits the move would generate.
That same 2020 document also predicted the reforms would generate an additional £2.395bn in unpaid tax, generated over the course of three tax years spanning 2020/21 to 2022/23.
However, HMRC’s February 2025 impact assessment data shows the reforms generated £1.8bn more than projected across the three tax years spanning 2021-2023, despite 50,000 people fewer than expected finding themselves in-scope of the private sector reforms.
The discrepancies in the figures have raised eyebrows among contracting market stakeholders, including Dave Chaplin, CEO of contracting authority ContractorCalculator, who told Computer Weekly that HMRC’s calculations simply do not add up.
“It’s implausible that 50,000 fewer people could generate 75% more tax revenue. The 120,000 figure seems significantly underestimated,” he said.
“If the original projection of £2.4bn was based on 170,000 people, that equals £14,088 per person. Using this same rate, achieving the new projection of £4.2bn would require 298,121 people – not 120,000.”
It’s implausible that 50,000 fewer people could generate 75% more tax revenue. The 120,000 figure seems significantly underestimated Dave Chaplin, ContractorCalculator
Chaplin continued: “The only reasonable conclusion is that HMRC’s figure of 120,000 affected individuals is incorrect. Our calculations indicate 58% of the original PSC population (510,000) was affected – not the claimed 23%, which is more than double HMRC’s estimate.”
Speaking to Computer Weekly, Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), said there were a couple of different ways that HMRC’s figures could be interpreted.
For one, the fact the reforms have raised £1bn more than expected suggests that in its quest to improve the private sector’s IR35 compliance, what it has actually achieved appears to be a sizeable “overcompliance” with the rules.
“[This is] where individuals were forced onto payroll even though they were genuinely in-business and in ‘outside IR35’ roles,” he said.
In the lead-up to both the public and private sector IR35 reforms being rolled out, Computer Weekly reported on numerous instances whereby organisations tried to fast-track their compliance with the reforms in several ways.
Some sought to reduce the additional administrative burden the reforms put on them by declaring all the contractors they engaged as working inside IR35.
Other organisations side-stepped the reforms by issuing blanket hiring bans on off-payroll workers. This led to many insisting the contractors they engaged could only continue to provide services to them if they did so through an umbrella company, as the IR35 rules do not apply to umbrella employees.
“Some that were forced into umbrellas were able to put their rates up, so the gross pay, and therefore the tax take, was higher,” continued Chamberlain.
Computer Weekly contacted HMRC to ask if it could give an account as to why more tax has been generated than expected from fewer than anticipated affected individuals, but the government department did not directly answer the question.
It is an issue, however, that HMRC appears to address in its February 2025 impact report with the acknowledgment that there has been a “small change” in its “initial estimates of the numbers of workers affected and the additional tax revenues generated” due to “newer data becoming available” and “improvements in [HMRC’s] methodology”.
Either way, Chaplin described the HMRC data discrepancies as “concerning” because it shows its data is “unreliable” and yet these numbers are what the department is holding up as proof the reforms have had the desired result.
“[This data] further undermines confidence in the official narrative and suggests policy decisions were based on flawed information rather than accurate assessments of the freelance market’s reality,” he said.
HMRC further revealed in its private sector IR35 impact assessment that the reforms may have partly contributed to a downturn in the number of new PSCs being created, which suggests the reforms may have put some people off becoming self-employed.
“We estimate around 45,000 fewer new PSCs formed around the time of the reform, up until the end of March 2022, compared to what we might have expected to happen based on historical trends,” said HMRC.
“These workers may have instead chosen to work in a different way, and we expect they will have remained, or started, working as employees.”
The way Chaplin sees it, HMRC’s data suggests the reforms have “stripped a quarter of legitimate freelancers of their self-employment status” and have “unnecessarily restricted the flexible workforce precisely when economic growth demands their contributions most”.
He added: “I think we can rightfully conclude that HMRC’s models and research should be taken with the annual output of a salt refinery – that is, with extreme scepticism.”
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