IR35 has been a thorn in the side of the contracting industry for over twenty years now.
This guide traces the history of IR35, from its first mention in 1999 through to the off-payroll reforms introduced in 2017 and 2021.
IR35 was introduced to tackle “disguised employment”, but its scope has expanded significantly over time. Today, responsibility for determining IR35 status often sits with the client rather than the contractor, fundamentally changing how the rules operate in practice.
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 an employee would.
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 to cover administration costs for those caught by IR35.
- guidance on how to determine employment status via leaflet IR56.
- a statement that service companies themselves were responsible for operating the legislation, not clients.
IR35 was introduced in April 2000
‘IR35’ became law in July 2000 via the Finance Act, with Schedule 12 containing the core provisions.
In essence, the rules were designed to prevent individuals who would otherwise be treated as employees from being taxed as self-employed.
Veteran contractors will remember the much-quoted HMRC example of an employee leaving on Friday and returning on Monday, doing the same job via a limited company.
At the time, the tax gap between employees and limited company directors was more pronounced. Directors could take a low salary and extract profits as dividends, which did not attract NIC.
Although that gap has narrowed over time, it remains one of the underlying drivers behind IR35.
The fight against IR35
IR35 has been widely criticised since it became law in 2000.
The Professional Contractors Group (now IPSE) was formed to oppose the legislation.
The group secured a judicial review at the High Court, but the case was dismissed on 2nd April 2001.
An appeal was heard in December 2001 and dismissed shortly afterwards, with permission to appeal further refused.
Despite this, IR35 remained in place and continued to evolve.
Simplification of IR35?
Following the 2010 election, the Office of Tax Simplification (OTS) was tasked with reviewing IR35.
Its 2011 report set out three possible approaches:
- suspending or abolishing IR35.
- introducing new “genuine business” tests.
- retaining IR35 with improved HMRC administration.
The government opted to retain IR35, largely due to concerns over lost tax revenue.
An IR35 forum was also established, bringing together industry and HMRC representatives. It still meets today.
In 2012, HMRC introduced Business Entity Tests (BETs) to assess enquiry risk.
These were widely criticised and withdrawn at the end of the 2014/15 tax year.
Further ‘protection’ for the Treasury required
Still dissatisfied with the level of tax collected, the government released a discussion paper in 2015.
This raised the possibility that clients, rather than contractors, would be responsible for determining IR35 status.
Public sector IR35 clampdown – Off Payroll rules
In 2017, the off-payroll working rules were introduced in the public sector.
From 6th April 2017, public sector bodies became responsible for determining the IR35 status of their workers.
To support this, HMRC introduced its online tool, CEST.
The tool has been widely criticised, particularly where its results appear inconsistent with established case law.
Private sector reform from April 2021
The off-payroll rules were extended to the private sector on 6th April 2021, following a one-year delay due to COVID-19.
You can find more detail here.
The key change was that responsibility for determining IR35 status shifted from the contractor to the client (for medium and large organisations).
In practice, this led to widespread risk-averse behaviour, including blanket bans on limited company contractors and a move towards umbrella company engagement models.
April 2023 repeal attempt and reversal
In September 2022, Chancellor Kwasi Kwarteng announced plans to repeal the off-payroll rules from April 2023.
This was reversed in October 2022 by Chancellor Jeremy Hunt, leaving the legislation unchanged.
Where IR35 stands today
IR35 remains fully in force, alongside the off-payroll rules introduced in 2017 and 2021.
For most contractors working with medium or large clients, IR35 status is now determined by the end client rather than the contractor.
This shift has had a lasting impact on the market, with fewer outside IR35 opportunities and greater emphasis on demonstrating genuine self-employment through both contract terms and working practices.
Ongoing tribunal cases continue to shape how IR35 is applied in practice, particularly around control, mutuality of obligation and substitution.
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