Abolish IR35 rules: calculation note

Central fiscal result

+£3.5bn - Net fiscal impact in 2027-28

Low case: +£1.0bn. High case: +£8.0bn. Positive numbers are fiscal costs or borrowing pressure. Negative numbers are Exchequer savings or receipts.

Scenario and baseline

• IR35 and off-payroll reforms are abolished.
• No replacement status test is modelled.
• Income tax and NI leakage are the main cost.
• Private compliance savings are not fiscal receipts.

Affected population

• Affected units are contractors, personal service companies and client firms.
• Professional services, IT and project work are most exposed.
• PAYE employees are indirectly affected through substitution risk.
• HMRC enforcement workload changes materially.

Gross impact

• Central cost assumes £3.5bn of annual tax leakage.
• Low case assumes only genuine contractors respond.
• High case assumes wider employment-to-contractor substitution.
• Compliance savings are economic, not fiscal.

Fiscal build-up, central case

• Income tax and NI leakage: +£3.8bn
• Corporation tax receipts on companies: -£0.4bn
• Administration saving: -£0.1bn
• Avoidance enforcement cost: +£0.2bn

Central net impact: +£3.5bn in 2027-28.

Behaviour and pass-through

• Low case assumes informal anti-avoidance remains effective.
• Central case assumes meaningful but contained incorporation response.
• High case assumes large relabelling of employment relationships.
• No productivity gain is counted as a fiscal offset.

Phasing

• 2026-27: +£0.7bn. Preparation or partial implementation.
• 2027-28: +£3.5bn. Main scenario year.
• 2028-29: +£4.5bn. Behaviour and pass-through develop.
• 2029-30: +£5.0bn. Steady-state uncertainty persists.

Main source groups

• Saez, Slemrod and Giertz, "The Elasticity of Taxable Income" (Journal of Economic Literature, 2012): Taxable-income elasticities include avoidance, income shifting and reporting responses, not only real work effort; relevant because IR35 directly concerns boundary-shifting between employment and contracting.
• HM Revenue and Customs, "Direct effects of illustrative tax changes" (2026): HMRC ready-reckoners show large revenue effects from income-tax, NI, VAT, fuel-duty and corporation-tax changes; primary fiscal scale anchor.
• Reform UK, "Our Contract with You" (2024): The Contract specifies thresholds, duties and business-tax proposals while claiming annual cost and saving totals; defines broad current tax pledges.
• Kleven, Knudsen, Kreiner, Pedersen and Saez, "Unwilling or Unable to Cheat? Evidence From a Tax Audit Experiment in Denmark" (Econometrica, 2011): Tax evasion is much lower where income is third-party reported than where income is self-reported; supports the revenue-risk case for anti-avoidance rules like IR35.
• Reform UK, "Our Policies" (2026): Used to define the pledge wording, policy scope and implementation scenario being modelled.