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IR35 was first announced on the 9th March 1999, which was both the day that the then Chancellor of the Exchequer, Gordon Brown announced his budget, and was also the date of the release of the Inland Revenues, as HMRC was then known, bulletin number 35, titled ‘IR35: Countering Avoidance in the Provision of Personal Services’. This therefore gave rise to the name ‘IR35’, and the Intermediaries Legislation came in to force in the UK in April 2000 within the Finance Act.
But what brought about the introduction of the Intermediaries Legislation? Historically the problem was that employees would be working from a company as an employee up until the close of business on a Friday, leaving as usual that evening and then returning the following Monday and working for the employer as a contractor via their own limited company. This has the effect that the contractor was now basically doing exactly the same job as before with no change but significantly increasing their take home pay. Contractors and the like were effectively posing as limited company’s but were doing nothing different to when they were employees, with HMRC receiving far less tax when they were now earning far more, leading to them being classed as disguised employees.
The introduction of IR35 was agreed to be useful and underpinned by sound principles. However, it was not long before tax investigations opened under the new legislative powers brought to light some serious flaws, with many questioning and legally challenging the process, application and legislation as a whole. Hindsight is a wonderful gift, and as always the retrospective view was that IR35 had been introduced too quickly and without the deep and meaningful consultation and thinking required to make it the required success. Some even went as far as to class it as a panic solution brought about to tackle the then ever increasing number of contractors.
In April 2007 the Managed Service Company (MSC) legislation was introduced, meaning that contractors were only able to receive dividends if they operated their own personal Limited Company. Those contractors that used an intermediary to receive payment could now only do so via PAYE, which meant they were subject to income tax and national insurance contributions, whilst the agency promoting the service of a MSC could be found liable for any underpaid tax and national insurance contributions.
In July 2010 HM Treasury established the Office of Tax Simplification, which consisted of a panel of officials and tax experts to look into areas of tax complexity, of which IR35 was one given the barrage of criticism it had faced and how unclear it was. A decision was to be made as to if it was to be revamped, suspended or discarded, the outcome of which would have massive ramifications for contractors. As it turned out, IR35 was not to be scrapped or suspended, but to be enhanced and modified.
From October 2010, a contractor that was inside IR35 also meant that they were inside the scope of the Agency Workers Regulations as the same tests applied to both.
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