How Government Reforms Keep Disrupting the Contracting Sector

From IR35 to Umbrellas: Why the Government Keeps Getting It Wrong

Over the past eight years, UK contractors have faced wave after wave of government reform. From IR35 to umbrella companies, policy changes have reshaped how freelancers work—often not for the better. With yet more rules on the horizon, many in the sector are asking: when will the meddling stop?

IR35: A Turning Point for Freelancers

The government’s IR35 reforms, introduced in 2017 (public sector) and 2021 (private sector), shifted the responsibility for determining employment status from contractors to their clients. The result? Many businesses simply stopped engaging contractors through Personal Service Companies (PSCs).

Blanket bans and risk-averse hiring meant thousands of legitimate freelancers were pushed out. HMRC’s own data shows about 45,000 fewer limited companies were formed than expected post-2021. Our research backs this up—many skilled professionals walked away from the sector, not by choice, but because they felt they had no viable route to continue.

Umbrella Companies: A “Necessary Evil”

With PSCs off the table for many, umbrella companies filled the gap. These intermediaries technically employ the contractor, handling payroll and taxes. Around 30–34% of freelancers now work this way—mostly because clients insisted.

But contractors tell us they’ve lost autonomy. They get the responsibilities of employment without the perks—no career path, no job security, and minimal support. Compliant umbrellas provide basic statutory rights, but many freelancers see the setup as a compromise rather than a choice.

When Things Go Wrong

The umbrella boom also attracted bad actors. Some firms skim pay, hide fees, or run avoidance schemes. The lack of regulation in the sector has left many contractors exposed. While the government finally acknowledges the issue, it’s frustrating—especially since it was their own policies that funneled people into these arrangements.

What’s Next: Agencies in the Firing Line

Now, HMRC plans to shift the responsibility for tax deductions from umbrella companies to recruitment agencies or end-clients. Starting in April 2026, if an umbrella fails to pay taxes, the agency could be on the hook.

This might push agencies to cut ties with dodgy providers—or even handle payroll themselves. While better oversight is welcome, it adds more disruption to a sector already weary of constant change.

Time for a Reset

Contractors don’t want handouts. They want fair, stable rules. After years of reactive policymaking, the government needs to work with the sector—not against it. If ministers are serious about supporting flexible work, it’s time to stop the legislative merry-go-round and let freelancers get back to business.