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Posted 14th May 2019

A brief history of IR35

Over the past few years IR35 has been one of the main topics of conversation amongst contractors and recruiters alike, with major reforms on the way that are likely to transform the procedures of countless agencies throughout the UK that work with the contracting community.

But where did it all begin? We are taking a look at the history of IR35, and how it has evolved over the years in response to industry developments and issues.

Why was IR35 introduced?

Named after the press release announcing the legislation (Inland Revenue 35), IR35 was first introduced in the Chancellor’s pre-budget speech in 1999, and formally introduced in April 2000, within the Finance Act.

The reasoning behind the legislation was to tackle income tax and NI contribution avoidance schemes through intermediaries on the part of limited company contractors and partnerships, that were deemed to be a significant issue for the HMRC (then Inland Revenue).

At the time, the Inland Revenue had found that a number of employees throughout UK industries had been recognising the tax benefits of establishing their own limited company, whilst still working in the same way as an employee, without paying the required contributions, ultimately labelled ‘disguised employees’.

One of the main criticisms of this legislation (still being said to this day) was the perceived lack of preparation time prior to it being introduced and therefore lack of clarity led to the legislation not working as effectively as it was hoped.

Reforms for the public sector

For over 15 years the responsibility for determining the IR35 status of a contractor lay with the contractor themselves, and therefore liability for missing tax should a HMRC audit uncover issues with a decision would be with the contractor. Following a review, the HMRC estimated that a third of contractors were operating under the incorrect IR35 status, and should be classed instead as an employee, and therefore paying the appropriate tax and NI.

As a result of this, IR35 reforms for the public sector were rolled out in April 2017, transferring responsibility for determining IR35 status from the contractor, to the agency. This undoubtedly caused a number of issues for the recruitment industry, who had limited knowledge of this legislation, which ultimately led to many being significantly unprepared once the reforms came into force.

Upcoming reforms to the private sector

With public sector reforms still a work in progress for the HMRC and agencies alike, the anticipated extension of these changes into the private sector has been delayed for one year, now to be introduced in April 2020 for large and medium sized businesses. The HMRC is using this additional time to produce more succinct guidance on IR35 and how it should be implemented into the procedures of an agency, whilst also allowing the recruitment industry as a whole the chance to adequately prepare.

Keep up to date with the latest development, tips and guidance on IR35 by following Exchequer Solutions on Twitter and LinkedIn.

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