What is IR35?

IR35 is a term that often confuses, scares and annoys those in the contracting community in equal measure.  In its most basic form, IR35 (the short name for the ‘Intermediaries Legislation) is the law that HMRC uses to reclaim PAYE tax and National Insurance Contributions retrospectively from contractors who they deem to be disguised employees i.e. they are treated and act like employees yet work through an intermediary, such as their own limited company, and claim the rights such as efficient tax breaks, which sees their take home pay increase as a result when compared to an employee. As the vast majority of contractors operate through their own limited company, often referred to as a PSC (Personal Service Company), this sees them fall under the IR35 spotlight and potentially caught – a term known as being ‘inside IR35’.

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But where did the term ‘IR35’ actually come from?  Well… on March 9th 1999, which was the release date of the Inland Revenue (as HMRC was then known) bulletin number 35, titled ‘IR35: Countering Avoidance in the Provision of Personal Services, and so the term ‘IR35’ was born.

In tandem with the above bulletin, on the same day, 9th March 1999, the then Chancellor of the Exchequer, Gordon Brown, announced the ‘Intermediaries Legislation’, which subsequently came in to effect in April 2000 within the Finance Act, but which has since moved to be within the ‘Income Tax (Earnings and Pensions) Act 2003 – Chapter 8: Application of Provisions to Workers Under Arrangements Made by Intermediaries’ legislation.

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But why was the introduction of the Intermediaries Legislation brought about? Historically the problem was that a company would have employees working for them, who would leave as usual one Friday evening, but return the following Monday and work for the company as a contractor via their own PSC.  With the contractor basically doing exactly the same job as before, and with no material change except seeing their take home pay increase, contractors were posing as a limited company but were doing nothing different to when they were employees, something that HMRC cottoned on to as they were now receiving far less tax.  It was this situation that led to them being termed ‘disguised employees’.

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As we all know, hindsight is a wonderful gift, and the retrospective view was, and remains, that IR35 had been introduced too quickly and without the deep and meaningful consultation and thinking required to make it the required success. This led to IR35 having many fierce critics, as whilst the legislation introduced was well meaning, it often failed to distinguish between a genuine contractor and a disguised employee.  In fact, not soon after its introduction HMRC were using their new powers to open investigations into the IR35 status of contractors, which brought to light numerous flaws and which led many to question and legally challenge the process, application and legislation as a whole.  Regrettably government and HMRC have not learnt from this and they continue to repeatedly botch IR35, which is no better illustrated than the April 2017 Public Sector changes, where new and updated rules continue to fall short of the standard required, opening up interpretation of the legislation to abuse on all sides as well as causing confusion and further angst.

To continue reading and to understand more about IR35, including what steps you can take to best protect yourself and remain inside IR35, the benefits of having your contract reviewed, the insurances available to protect yourself, and the steps that the dreaded HMRC investigation entails, read our IR35 Knowledge Hub.