Conception of IR35: 1999
The term IR35 itself is shorthand for Intermediaries Legislation, as coined by then-Chancellor Gordon Brown back in 1999 during the pre-budget speech.
On the very same day, an Inland Revenue bulletin (as HMRC was known at the time) was released for this legislation. It was numbered 35th of the budget, and therefore titled ‘IR35: Countering Avoidance in the Provision’, giving IR35 its name.
But why was the Intermediaries Legislation introduced in the first place?
The problem originated in how easy it was to change employment status. It was possible for a person to be employed by a company on Friday and return as a contractor on Monday, having set up their own limited company to supply services through over the weekend.
Of course, this meant that the new contractor was still doing exactly the same job as before with one exception; their take-home pay was significantly increased thanks to not having to pay income tax or NI contributions. This lead to them being referred to as ‘disguised employees’.
Implementation of IR35: 2000
The IR35 legislation first became law via the Finance Act 2000 (Schedule 12) and has remained on the statute book ever since. This made it illegal to use a self-employed status to avoid income tax and NI contributions.
The first iteration of the ‘three rules’ that the current CEST tool is based on were thus identified as control, substitution, and mutuality of obligation. You can read more about these tests here.
Opposition to IR35: 2001-2010
One of the fiercest opponents of IR35 from the outset was IPSE (then known as PCG), who demanded a judicial review of IR35 in early 2001.
However, the High Court ruled in favour of HMRC, and the contractors’ group lost its appeal in December 2001. In response to this lost appeal, a whole new industry grew around protecting contractors from the effects of IR35.
Many organisations became increasingly vocal, aided by the introduction of wide-spread internet access over the last decade. Dedicated anti-IR35 and Loan Charge groups snowballed thanks to social platforms and media coverage.
The overhaul of IR35: 2011-2014
When the Tory/Lib-Dem Coalition Government came into office in May 2010, one of George Osborne’s first projects was the Office of Tax Simplification. The OTS was almost entirely dedicated to improving IR35.
On 10th March 2011, the OTS provided the Government with three potential solutions to IR35. They were:
- Suspension of the legislation, followed by abolition
- The creation of a series of business tests
- To keep IR35 in place but overhaul the way it is administered.
With significant amounts of revenue at stake, HMRC kept IR35 in place but promised to revise the legislation. The improvements promised were:
- 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.
HMRC published its new ‘Business Entity Tests’ together with a set of typical IR35 scenarios on its website in May the same year.
The tests were designed to give participants an idea of the risk they faced of being selected for an IR35 investigation. However, the tests were widely criticised as it became increasingly apparent that most contractors would be at a ‘medium’ or ‘high’ risk of investigation – somewhat redolent of how CEST has an overwhelming proportion of outside-IR35 determinations now.
After three years of heavy objection by a variety of organisations, HMRC announced in October 2014 that the BETs would be abolished from April 2015.
PR Plan for IR35: 2015 – 2016
HMRC released a list of 32 recommendations on how to improve IR35 early in 2015, which included providing more clarity and guidance for those potentially affected by the legislation.
However, this attracted general scorn from IR35 experts. The recommendations were dismissed as nothing more than a flimsy PR plan and did very little to allay the uncertainty regarding IR35 within contracting.
Following the 2015 Summer Budget, the Government released a document called ‘How to make IR35 more effective in protecting the Exchequer’. For the first time, it was speculated that it may fall to clients to determine the employment status of contractors – an immediately unpopular idea.
On March 16th 2016 , 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. This note explained that public sector clients would be responsible for their worker’s employment status determination.
IR35 Reform and Public Sector Rollout: 2017
A new IR35 Check Employment Status Test (CEST) was launched in early March 2017 with the intention of helping contractors, clients and agents determine whether or not someone should be inside or outside IR35.
This was quickly followed by the Off-Payroll Rules, which came into effect for the public sector in April the same year. The accuracy of CEST results were notoriously dire from the outset, with thousands of contractors who had always been determined as outside IR35 suddenly being found as inside, and having to pay the price. CEST is continuously criticised still now (BBC chiefs spoke out about it last year), despite HMRC remaining firm that the test is fit for purpose. This caused, and causes, a huge amount of anxiety for public sector contractors.
IR35 in the Public Sector: 2018 onwards
In the October 2018 Budget, the Chancellor announced an extension of the existing off-payroll working rules to the private sector, effective as of April 2020. This was received badly, especially after the effects of the legislation on the likes of BBC and NHS contractors.
It was only a matter of months before tax investigations opened under the new legislation revealed some grievous issues. Many contractors and industry professionals legally challenged the process, application and legislation as a whole while scores more have protested the unjust nature of IR35 across media platforms.
On March 5th 2019, HMRC published a consultation document for industry professionals to voice their concerns. This document is open for comment until May 28th 2019.
Despite weighty opposition, IR35 is still set to be rollout out across the private sector in April 2020. It’s been observed that the public sector will be a much more complex determination process from contractor to contractor and that CEST is hugely unfit for this purpose.
It’s also been forecast that the same drop in contracting as seen in the public sector will be repeated due to determination fears.
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