When was IR35 introduced? Timeline from 1999 to 2023

IR35 has been a thorn in the side of the contracting industry for over twenty years now.

In this guide, we trace the history of IR35 – from its first mention in 1999 to the ‘Off Payroll’ changes which took place in 2017 and 2021.

In the beginning… the HMRC press releases

On 9th March 1999, The Inland Revenue (HMRC) published a press release – numbered “IR 35”.

The release detailed Gordon Brown’s plans to create legislation to “counter avoidance in the area of personal service provision.”

The government at the time was concerned about the growing practice of so-called ‘disguised employment’.

This occurs when someone works for a client – in the same manner as a traditional employee – but provides their services via a limited company. As a result, the limited company worker has a lower tax liability than if they were an ’employee’.

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

The revised proposals included:

  • details of a 5% expense allowance which would cover the administration costs of people caught by IR35.
  • guidance on how to determine a worker’s employment status via  leaflet IR56,
  • a statement that service companies themselves were responsible for “operating the legislation”, not clients.

IR35 introduced in April 2000

‘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’.

Veteran contractors will remember the much-quoted HMRC example of an employee quitting their job on Friday, only to return on Monday as a limited company contractor.

Limited company directors may decide to pay themselves a small salary – below the tax and NIC thresholds.

Directors can extract company profits as dividends, which don’t attract any NIC liabilities.

At the time – in 2000 – there was a fairly big difference between the tax burden carried by employees vs. limited company directors. Over the following 20 years, the difference has closed significantly.

The tax difference – and the increased number of limited company workers – are the main reasons why the government implemented IR35.

The fight against IR35

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

The Professional Contractors Group (since renamed IPSE), was formed to fight IR35.

The PCG received permission for a judicial review of IR35 at the High Court. However, on 2nd April 2001, the court found against the group.

The PCG petitioned the Court of Appeal, which 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 on the statute books to this day – albeit with subsequent additions.

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, just before the Budget.

Three proposals to improve the administration of IR35 were put forward:

  • the suspension (and eventual abolition) of IR35.
  • the introduction of new ‘genuine business’ tests.
  • 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.

An IR35 forum of industry experts was also formed – it still meets every month to this day.

In 2012, HMRC introduced its Business Entity Tests (BETs), designed to work out 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. The Tests were withdrawn from use at 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.

This raised the possibility that clients, rather than contractors, might be tasked with determining the IR35 status of contracts in the future.

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, on April 6th 2017, public sector bodies became responsible for determining the IR35 of their workers.

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 consistently poor since its release 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. Beforehand contractors could self-certify their IR35 statys.

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, 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.

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Last updated: 17th January 2024