What You Need to Know Now
Despite years of pushback from contractors, recruitment agencies and even end clients, IR35 reforms are now deeply embedded in the public and private sectors as we head into 2025. Since the off payroll working rules were extended to the private sector in April 2021, their impact continues to reshape the contractor landscape, and agencies are still adjusting.
So, what is IR35 now, how has it changed, and what does it mean for recruitment businesses and contractors going forward?
What is IR35
IR35, formally known as the Intermediaries Legislation, is a UK tax rule designed to determine whether a contractor is genuinely self-employed or essentially operating as an employee in disguise. The legislation was introduced to address a growing problem of individuals offering their services through a limited company or Personal Service Company (PSC) while working under terms and conditions that closely resemble those of a traditional employee.
At its core, IR35 is about employment status for tax purposes. If a contractor is found to be ‘inside IR35’ HMRC considers them a deemed employee, meaning they should pay tax like a regular staff member, through PAYE, with full deductions for Income Tax and National Insurance Contributions (NICs). On the other hand, those ‘outside IR35’ are considered to be genuinely self-employed and can continue to enjoy the tax efficiencies associated with operating via a limited company.
Whether a contract falls inside or outside IR35 depends on a range of status indicators, such as:
- Control – Does the client control how, when and where the work is done?
- Substitution – Can the contractor send a qualified substitute to carry out the work?
- Mutuality of Obligation – Is there an ongoing expectation of work and payment between the two parties?
These are just a few of the key factors HMRC and tribunals use to determine employment status. The reality is that IR35 assessments are complex and the rules apply based on specific context, often requiring a detailed review of both the contract terms and actual working practices.
Importantly, IR35 is not just a tax loophole issue, the legislation exists to create a fairer system, preventing individuals and businesses from artificially structuring engagements to reduce tax liabilities while still maintaining the benefits and characteristics of employment.
How Has IR35 Best Practice Changed?
Here’s a snapshot of where things now stand in 2025:
- Since April 2017, public sector clients have been responsible for determining the IR35 status of contractors within their supply chain.
- This same rule was extended to medium and large private sector businesses in April 2021.
- In 2025, IR35 compliance is a shared responsibility between clients and recruitment agencies. If status determinations or tax deductions are incorrect, liability lies with the fee-payer, usually the agency.
The key shift? Agencies and clients can no longer bury their heads in the sand. Non-compliance carries financial and reputational risks, and HMRC is increasingly active in enforcement.
Digital Tools and Compliance Tech in 2025
While the original HMRC Check Employment Status for Tax (CEST) tool was criticised for its limitations, improvements have been made, but many still find it lacking nuance. In response, agencies have turned to third-party IR35 platforms, enhanced compliance workflows, and contract review services to stay on the right side of the law.
Automation is playing a more significant role than ever. From onboarding and vetting contractors to managing SDS (Status Determination Statement) documentation, tech is now critical for confidently navigating IR35.
How Is This Impacting Contractors and Agencies in 2025?
- Contractors continue to feel the squeeze. Depending on rate negotiations and umbrella arrangements, those deemed inside IR35 often see their take-home pay drop by up to 25%.
- Some clients, particularly in tech and finance, opt for permanent hires instead of dealing with IR35 uncertainty.
- Others have increased day rates to retain top freelance talent, passing the cost to agencies or clients.
- Agencies, especially those in highly regulated sectors (healthcare, government, banking), invest in compliance expertise, legal advice, and risk mitigation strategies to remain competitive.
The contracting landscape is more complex, but agile and informed agencies can still thrive.
What’s Next for IR35?
While there have been calls for further reform, especially around the blanket assessments some businesses have implemented, no significant legislative changes are expected in 2025. IR35 remains politically contentious, and any future government could look to streamline or overhaul the system.
HMRC continues to signal that enforcement is a priority, especially where businesses have taken a lax approach post-2021.
What Should Recruitment Agencies Be Doing Now?
If your agency places contractors in any sector, IR35 is your concern.
Here’s what you should be doing in 2025:
- Review your entire contractor base for IR35 exposure
- Ensure robust SDS processes are in place and well-documented
- Use independent tools or specialists for complex status determinations
- Train consultants and clients to understand risk, roles, and responsibilities
- Build relationships with compliant umbrella companies (and vet them thoroughly)
- Embrace tech to automate, streamline, and de-risk your compliance approach
IR35 in 2025 and Beyond
The dust has settled somewhat, but IR35 continues to demand attention. It’s no longer a niche issue; it’s a central component of contractor recruitment in the UK.
Eclipse Recruitment Software is designed to support agencies in navigating the complexities of IR35 compliance. With built-in tools for tracking contractor assignments, managing Status Determination Statements (SDS), and maintaining audit trails, Eclipse helps ensure your processes are consistent, transparent, and up to date. By streamlining documentation, integrating compliance checks and supporting collaborative workflows between consultants and clients, Eclipse Core Pro empowers agencies to stay compliant and reduce risk, without slowing down operations.
Agencies that stay ahead, invest in compliance, and adapt their operating models will not only survive but also become trusted partners in an increasingly compliance-driven market.
