IR35 Guides - Are you inside or outside IR35?

Following the Chancellor's decision to maintain the IR35 status quo at the last Budget, we take a look back at how the intermediaries legislation came into being.

In the beginning...

On 9th March 1999, The Inland Revenue (HMRC) published a press release - "IR 35" - which detailed Gordon Brown's plans to create legislation to "counter avoidance in the area of personal service provision."

The Government said it had been concerned that people who were performing work in the manner of a normal company 'employee' were setting up their own limited companies and continuing to work in the same way, but paying less tax and national insurance by virtue of their new service company structure.

After a consultation period, the Inland Revenue issued a second press release outlining how the intermediaries legislation would work.

The revised proposals included details of the deemed payment 5% expenses allowance which would apply to people caught by IR35, guidance on how to determine a worker's employment status were published in leaflet IR56, and a statement that service companies themselves were responsible for "operating the legislation", not clients.

IR35 becomes law

'IR35' became law in July 2000 via the Finance Act - with Schedule 12 containing details on IR35 itself.

In essence, the tax rules were created to prevent people who would ordinarily be viewed as 'employed' by HMRC from being taxed as if they were 'self employed'.

An individual could leave a traditional permanent PAYE job on a Friday, only to return the following Monday as limited company contractor - paying less tax than he did before, but performing an almost identical role to the one he did as a permanent employee.

Via a limited company you can draw down most of your income in the form or dividends, which are not subject to National Insurance Contributions (NICs), whereas permanent employees pay income tax and NICs on all their income.

This is why the Government was keen to clamp down on so-called 'disguised employment'.

The fight against IR35

IR35 has been widely criticised since it became law in 2000.

The Professional Contractors Group, which was created to fight IR35, received permission for a judicial review of IR35 at the High Court. On 2nd April 2001, the court found against the PCG.

The PCG petitioned the Court of Appeal, who heard their case in early December 2001. The appeal was dismissed on 21st December 2001, and permission to appeal to the House of Lords was refused. IR35 has remained law to this day.

Since 2002, the PCG has concentrated on its IR35 case law strategy, and protecting contractors and freelancers against the punitive tax rules.

Simplification of IR35?

Following the election of the Coalition Government in May 2010, a new body - the Office of Tax Simplification (OTS) - was formed. Once of its main tasks was to review IR35 "as a priority".

Its interim report into IR35 was published in March 2011, prior to the Budget.

Three proposals were put forward - the suspension (and eventual abolition) of IR35, the introduction of new 'genuine business' tests, and a maintenance of the status quo but with improved HMRC administration of IR35.

The Chancellor decided to keep IR35 in force, as abolition could result in a significant shortfall in Treasury NIC receipts - primarily from umbrella companies.

A new specialist helpline has been proposed, and better guidance is to be produced to remove the uncertainty created by the IR35 rules. The IR35 overhaul is being presided over by an IR35 Forum comprised of industry experts, accountants, as well as HMRC officials.