Has IR35 hamstrung the UK tech industry?

Author: Markel UK

But ever since changes to IR35 (or ‘off-payroll working rules’) were rolled out to medium and large organisations in the private and third sectors in 2021, the contractor supply chain has suffered. The reforms shifted responsibility for determining employment status from contractors to the end client, causing confusion and irritation among many contractors, recruitment agencies and clients alike.

Introduced to address tax non-compliance, the legislation was designed to stop contractors working as ‘disguised employees’ through an intermediary such as a limited company. If someone is deemed to fall ‘inside IR35’ for a contract, they are classed as an employee for tax and national insurance purposes. Being outside IR35 means someone counts as self-employed.

Four years on and the reforms continue to have an adverse effect on tech companies and end-user organisations. Many large companies are reportedly still enforcing blanket bans on outside-IR35 roles or on using limited companies. While some contractors have adapted, increasing their rates to take on inside-IR35 roles, a lot of skilled specialists are still refusing ‘inside’ contracts.

At the Association of Professional Staffing Companies (APSCo), IR35 remains one of the top concerns it addresses to government. Tania Bowers, APSCo’s global public policy director, says: “IR35 has definitely played a part in the complexity of the marketplace and how many contractors are operating within it.”

More than half (55%) of contractors have rejected an offer of work over the past 12 months due to it being deemed inside IR35, according to the Association of Independent Professional and the Self-Employed (IPSE). The off-payroll reforms are also causing a UK exodus, with almost a quarter (24%) planning to seek contracts abroad in the next year to escape the rules.

Wider workplace and economic impacts

Within fintech, skills shortages are a major concern. A survey by UK industry body, Innovate Finance, revealed that 42% of fintech companies cite a lack of qualified software engineers as a significant barrier to growth. And across cyber firms, the government estimates that 30% faced a problem with a technical skills gap in 2024.

In an era of increasingly sophisticated cyberattacks, with cyber and data security still dominating business risks, insufficient experts in the labour market could exacerbate these threats 3. Research by the University of Birmingham estimates that across all sectors, including tech companies, the digital skills shortage (including advanced skills) could cost the UK economy up to £27.6bn by 2030 4.

IR35 isn’t going away, however, says Bowers. “HMRC has started investigations with bigger end-client businesses. But how that flushes through, and how aggressive HMRC is in terms of reassessing contractor assignments, the picture is unclear. However, it will drive the market in one direction or another: the more aggressive HMRC is, the more problematic because you’re going to drive more of the market to be inside IR35.”

Skills shortages in any workplace inevitably affect existing staff, who are more likely to feel overburdened. And few people do their best work when they’re burnt out. By nature, tech work is often complex and project-based, so the current shortage of specialists can create project delays, difficulties in scaling operations and driving innovation. According to a survey of employers by the World Economic Forum 5, skills gaps are considered the biggest barrier to business transformation.

Labour’s manifesto includes plans for a major employment reform: introducing a single worker status. The government believes our current three-tier system of employed, self-employed and worker has “contributed to the rise of bogus self-employment”. Bowers says this reform “could put a lot of pressure on people wanting to work as self-employed because of the complexity and costs of employment”. While Josh Toovey, senior research and policy officer at IPSE, says if implemented correctly, the proposal could “bring about a greater alignment of tax and employment status, which would be widely welcomed; particularly if it improves the application of IR35 case law”.

Whatever the outcome, the current skills shortage is still very real. And in an industry that needs contractors, and is so critical to the UK’s future economy, solving the tech talent crisis is paramount.

Sources:

1. https://www.techuk.org/shaping-policy/digital-economy.html

2. https://www.lse.ac.uk/study-at-lse/online-learning/insights/the-top-10-most-in-demand-tech-careers-for-2025
3. https://www.icaew.com/insights/viewpoints-on-the-news/2024/oct-2024/cyber-security-tops-business-risks-but-ai-on-the-rise#:~:text=Poll%20of%20chief%20internal%20auditors,chief%20internal%20auditors%20(CIAs)
4. https://pureoai.bham.ac.uk/ws/portalfiles/portal/253545838/Digital_Skills_Executive_Summary_-_Dec_2024.pdf
5. https://www.weforum.org/publications/the-future-of-jobs-report-2025/digest/