IR35 – a brief history of the Intermediaries Legislation

IR35 has been a thorn in the side of the contracting industry for almost two decades now. In this article, we look at the history of IR35 – from its first mention in early 1999, to the ‘off-payroll’ changes to public and private sector organisations in 2017 and 2022.

In the beginning…

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

The Government expressed its concerned that people who were performing work in the manner of traditional ’employees’ were setting up their own limited companies and continuing to work in the same way, whilst paying less tax and national insurance contributions (NICs) 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 of 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 (since renamed as IPSE), 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.

Simplification of IR35?

Following the election of the Coalition Government in May 2010, a new body – the Office of Tax Simplification (OTS) – was formed. One 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 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.

In 2012, HMRC introduced its Business Entity Tests (BETs), designed to demonstrate the likely risk a contractor would face of being selected for an IR35 enquiry. Unfortunately, the scoring, weighting and other factors deemed the BETs to failure, and they were withdrawn from use from the end of the 2014/15 tax year.

Further ‘protection’ for the Treasury required

Still dissatisfied with the amount of tax collected as a result of IR35 (£430m per year in non-compliance), the Government released a ‘discussion paper’ in mid-2015, which raised the possibility that clients, rather than contractors themselves, might be tasked with determining the IR35 status of contracts.

Public Sector IR35 clampdown – Off Payroll rules

In early December 2016, following an announcement in the March 2016 Budget, the Government released draft provisions to clamp down on tax avoidance by so-called ‘off-payroll’ workers in the public sector.

As a result, from April 6th 2017, public sector bodies are now responsible for determining whether contractors are caught by IR35 or not.

To help contractors and clients work out whether a particular contract is subject to the Intermediaries Legislation, HMRC released CEST – an online employment status tool.

Reviews of this tool have been poor to put it mildly, as the results appear not to reflect the reality of an individual’s assignment, nor case law.

Private sector reform from April 2021

Despite this, and widespread condemnation of the chaotic way the public sector rules were implemented, the Chancellor announced that the off-payroll rules will be extended to the private sector from April 2020 onwards.

Following a 12-month COVID-19 delay, the off-payroll private sector extension took place on 6th April 2021.

You can find out more here.

The main effect of this change is that clients (not contractors) are now responsible for making IR35 determinations of their workers. To avoid potential liabilities resulting from the flawed legislation, this has resulted in blanket bans of limited company contractors by many larger clients.

April 2023 Off Payroll repeal subsequently cancelled

To the surprise of the industry, in September 2022, the Chancellor Kwarsi Kwarteng announced that the Off Payroll working rules (‘Chapter 10’) would be scrapped from April 2023 onwards.

However, this decision was reversed on October 17th 2022 by new Chancellor Jeremy Hunt.

So, for now – at least, IR35 and the Off Payroll rules remain firmly in place.

About the Editor

  • James Leckie

    James is an experienced business and finance writer. He studied economics and worked for large companies including British Airways, Citi and JP Morgan before working as a data analyst IT contractor in the late 1990s and 2000s. He founded Contract Eye in 2006 and also writes widely for a number of popular business sites. Connect with James on LinkedIn.

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Last updated: 3rd May 2023