HMRC's Quiet Retreat -Is IR35 dying a slow death?

Shadow Chancellor Andrew Griffith MP recently made headlines by pledging that "the next Conservative government will replace IR35, not reform it, not review it, but replace it with a new system that respects the right of the self-employed to choose their status and only prevents actual abuse.”  Wow! But let's get back to the present day.

John Healey, the incumbent Chancellor, is diametrically opposed to any such thing. During his previous tenure as Economic Secretary to the Treasury, he always defended the original 1999 Budget Note 35 (IR35 rules) against heavy criticism from contractor groups and industry bodies. He was also instrumental in pushing through the Managed Service Company (MSC) legislation in 2007. Having been actively involved throughout the consultation period in the run-up to the MSC rules coming into force, I met with him and saw firsthand how he approached the sector.  He is not for turning!

Realistically, contractors are looking towards 2029 or 2030, assuming a Conservative return to power, before any meaningful change to or removal of IR35 becomes a possibility. 

So, what does the landscape look like in the meantime? 

When HMRC pushed through the Off-Payroll Working rules, the real goal wasn't just about hammering contractors, it was to do with disbanding the costly, Newcastle-based IR35 Unit by shifting compliance onto contractor clients. The rules were supposed to allow self-governance in the contractor market. Instead, the threat of debt transfer and the persistent mismatch between employment status for tax and employment status in general created an atmosphere of fear, leading to a sharp downturn in contracts for true PSC contractors working on their own account. 

Today, HMRC’s enforcement focus has shifted heavily toward mass-marketed tax avoidance schemes rather than dissecting individual working relationships. With the Fair Work Agency taking over National Minimum Wage and broader compliance monitoring, bit by bit HMRC is stepping back from routine employment oversight. While the Fair Work Agency’s primary mandate is protecting employment rights and tackling false self-employment, by 2030 and beyond, could the remit expand to monitor IR35-style compliance, effectively stepping into the shoes of the old Newcastle unit? Perhaps.

It is looking to me that HMRC is outgrowing its obsession with IR35 altogether and I say this with reference to a few incoming legislative changes. Namely, upcoming rules targeting director drawings and dividends mean that drawings used for personal expenses will increasingly be treated as earnings subject to PAYE. Simultaneously, mandatory payroll reporting for director benefits (such as company cars), the removal of the dividend allowance, and rising dividend tax rates are narrowing the tax gap between PAYE and the taxes involved in running a small business. 

So, here’s the thing, the reality is that IR35 isn't going to be repealed—it’s going to become obsolete. HMRC didn't fix the off-payroll problem; the department simply engineered a system where it no longer had to care about it. By shifting the administrative burden to end-clients, delegating employment rights monitoring to the Fair Work Agency, and systematically squeezing the tax margin between PSC and PAYE taxes, HMRC has subtly checked out and no-one has really noticed.

We can put the mindset into words... ‘Why waste taxpayer’s money and our resources fighting complex status battles at tax tribunals, when we can extract the exact same revenue by squeezing small business taxes at source?’ 

So don’t be fooled, IR35 isn't getting replaced by some sort of political heroism; it's being quietly abandoned by a tax authority that has already found far easier ways to raise more taxes for HM Treasury.