The Intermediaries Legislation (aka IR35) was first mentioned in a 1999 Inland Revenue press release. The rules to counter alleged tax avoidance via the use of ‘personal service companies’ became law in 2000, and remain in place today. Here we look at the key events which have taken place over the past 20 years.
Here is a concise history of IR35 from its inception to date (2020).
The original press release
On 9th March 1999, the Inland Revenue issued a press release (IR 35) which outlined the Government’s plans to clamp down on the growing use of one-man-band limited companies to provide professional services to clients, where the individual was still working in a manner akin to a traditional ‘employee’, while enjoying the tax benefits afforded them by a corporate structure. You can still view the original release on the National Archives site
After a consultation period, the Inland Revenue published a subsequent press release (here) on 23rd September 1999 which attempted to provide more of a safety net to those caught by IR35 (such as providing a 5% ‘expenses allowance’), and provide more guidance on how employment status would be determined.
IR35 becomes law in 2000
The legal basis for ‘IR35’ is contained in Chapter 8 of ITEPA 2003
Opposition to IR35
One of the fiercest opponents of IR35 was the PCG (now known as IPSE), a representative group for contractors and freelancers, who sought permission for a judicial review of IR35 in early 2001.
The High Court ruled in favour of the Inland Revenue, and the contractors’ group lost its appeal in December 2001.
In the interim period between 2001 and now, an entire IR35 industry has emerged, consisting of employment status experts, tax protection insurers, IR35 contract review services and a whole range of associated services.
Business organisations and other interested parties have continued to lobby against IR35, claiming that the rules are unfairly targeted, and the advice too ambiguous to provide individuals with any certainty over their IR35 status.
Overhaul of the IR35 regime – 2011
When the Coalition Government came into office in May 2010, one of George Osborne’s first announcements was the creation of the OTS (Office of Tax Simplification) which was tasked with, amongst other things, suggesting ways in which IR35 could be improved.
On 10th March 2011, the OTS provided the Government with three potential solutions to IR35: suspension followed by abolition, the creation of a series of business tests, and to keep IR35 in place but overhaul the way it is administered.
Given that the potential direct and indirect revenue loss from the removal of IR35 could be significant, the Chancellor opted to keep IR35 in place but pledged to overhaul the way HMRC had been dealing with the legislation.
The improvements demanded of the IR35 regime included:
- creating a dedicated helpline staffed by specialists.
- publishing clear guidelines and scenarios to help individuals determine their IR35 status more easily.
- restricting IR35 reviews to high risk cases..
- creating a new IR35 Forum (see below) to monitor HMRC’s improved enforcement of IR35.
The IR35 Forum
The Forum itself has a diverse membership, including members of the leading recruitment and contracting industry bodies (APSCo, REC, FCSA, FSB), employment status specialists, members of the leading accountancy bodies (ICAEW,CIOT,ACCA), and HMRC personnel.
You can access meeting minutes, and background information on the Forum here.
Business Entity Tests
Following a series of meetings, HMRC published its new ‘Business Entity Tests’ together with a set of typical IR35 scenarios on its website in May 2011. The tests were designed to give participants an idea of the risk they face of being selected for an IR35 investigation. However, the way the test results were scored was widely criticised, as most contractors would be at a ‘medium’ or ‘high’ risk of investigation, according to the results.
In October 2014, HMRC announced that the unpopular BETs would be abolished from April 2015.
‘PR Plan’ for IR35 – Jan 2015
In early 2015, HMRC released a series of 32 recommendations on how to improve IR35 – using input provided by the IR35 Forum. This included providing more clarity for those potentially affected by the rules.
Dismissed by one expert as a ‘PR Plan for IR35’, the plan contained little substance, and the uncertainty felt within the industry remained as strong as ever.
How to make IR35 more effective?
Following the 2015 Summer Budget, the Government released a discussion document entitled ‘how to make IR35 more effective in protecting the Exchequer’. This raised the possibility that, for the first time, clients might be forced to determine the employment status of contractors.
HMRC believed that IR35 is ineffective and that “non-compliance with the legislation is widespread”. In fact, the Government stated that non-compliance may cost the Exchequer £430m per year – a figure that has been widely ridiculed by industry experts. Little has changed in terms of such claims since the Intermediaries Legislation first became law in 2000.
Off-Payroll Working in the Public Sector
On Budget Day 2016 (March 16th), the Government announced that there would indeed be a clampdown on so-called ‘off-payroll working’ within public sector organisations.
Draft legislation was published in December 2016, alongside a technical note which explained the practicalities of IR35 enforcement by public sector bodies after April 6th 2017.
In essence, from this date, public sector clients will become responsible for working out whether or not their workers are caught by IR35 or not. If they are deemed to be ’employees’ after all, then the client will be responsible for operating IR35 and deducting PAYE and NICs from any caught workers – at source.
Further HMRC guidance was published in February 2017 to help contractors and clients understand the implications of the new rules.
New IR35 Test – March 2017
A new IR35 Employment Status Test (ESS) was launched in early March 2017 – to help workers, clients and agents determine whether or not someone is caught by IR35. This tool evolved into the CEST tool that is in use today.
Reports on the accuracy of results have been decidedly mixed, however, HMRC says that it will stand by the results of any given test, assuming that all questions are answered accurately.
Off-Payroll extension to the private sector
At the October 2018 Budget, the Chancellor announced an extension of the existing off-payroll working rules to the private sector, effective from April 2020. This will impact all clients which are not defined as small companies.
The term ‘IR35’ now has a wider meaning
Strictly, the term ‘IR35’ applies to Chapter 8 of ITEPA 2003 (and originally the reference number of the original Inland Revenue press release), in cases where the contractor is in charge of determining his/her employment status.
Chapter 10 of ITEPA 2003 provides the legal basis for the engager (‘client’) becoming responsible for determining the employment status of the worker in the public sector (from April 2017) and private sector (from April 2020).
Of course, the term ‘IR35’ is widely used to describe both the original legislation, together with the off-payroll addition post-2017.
2020 – a sham ‘IR35 review’
Following up on pledges made in the run-up to the December 2019 General Election, the Chancellor announced that an IR35 review would be undertaken, however this turned out to be merely an exercise in ensuring the smooth running of the private sector off-payroll rollout, than a meaningful review of the underlying legislation
April 2020 – private sector implementation – delayed to April 2021
As a result of the COVID-19 outbreak, the Government deferred the implementation date of the private sector IR35 changes until April 2021.
The new ‘off payroll’ rules did finally go ahead, as expected, in April 2021. You can read dozens of IR35 guides here.