The IR35 legislation has been changing and adapting frequently over the past decade, and its growing importance shows no intention of slowing down. As they say, to fully understand something, one must first look to its history, so here we are. We give you the history of IR35 (in brief).
For starters, the name itself, IR35, came to pass within the Inland Revenue before it became known Her Majesty’s Revenue & Customs (HMRC). It was first mentioned, to every contractors delight (hardly) within a new release of tax rules and regulations in 1999. The official title of the legislation was the ‘Intermediaries Legislation’, which was first formally uttered by the then Chancellor Gordon Brown in the Pre-Budget speech of ’99. As tax legislation, IR35 was implemented properly in the Finance Act for April 2000, and since then, has had a huge impact on contractors nationwide. The term ‘IR35’ actually came from the press release reference (Inland Revenue 35).
The original reasons for the IR35 legislation being introduced was to challenge what was seen at the time as tax and National Insurance Contribution (NICs) avoidance schemes through the use of intermediaries, in this case, partnerships and limited companies. This was a huge problem at the time, as because of the lax system regarding this area of tax, professional employees were able to convert their status to that of a limited company or a partnership extremely easily and practically instantaneously. The problem here for the tax office was that these employees come contractors were able to decrease the amount of tax they paid considerably, therefore increasing their take home pay tenfold. This huge amount of ‘contractors’ were able to pose as limited companies although most were still in exactly the same position as they were when they were employees, therefore posing the further problem for the tax office as to how they pinpoint these befittingly named ‘disguised employees’.
With a large number of professionals posing as contractors when they were still very much employees, the current Inland Revenue at the time began to panic and decided that something must be done about the increasing amount of employees managing to become contractors, therefore avoiding a considerable amount of tax. This is what brought about the ‘Intermediaries Legislation’ (IR35 in essence), a way of the treasury seeing these contractors who were still practically employees, and dodging tax that they should rightfully be paying.
*KEY POINT* The limited companies used by individuals to offer their services to clients became referred to as personal service companies. (PSCs)
When it was first introduced, so much was taking place regarding limited companies and contractors, and the tax office’s new legislation (IR35) was beginning to pick up speed and the effects were beginning to be felt throughout the contracting and freelancing zones. The initial idea for IR35 was sound, but as the legislation took proper form and was the result of some serious tax based enquiries, people began questioning, doubting and in some cases attempting to challenge the Inland Revenue’s new system. The thoughts and views of many was that IR35 was legislation brought about far too abruptly and suddenly, and was clearly drafted up as a panic solution to the increasing number of contractors.
Most contractors criticise IR35, deeming it a badly thought out system and a far too hastily put forth idea, and several endeavours have been put forth to scrap the legislation entirely but none have ever come to pass. IR35 today has changed somewhat and approaches to it are different in many cases, but still the same views on the legislation apply. People argued that the IR35 way was too complicated and was a confusingly over complex system of tax, and as a result, back in July 2010, as an attempt to ensure small businesses with a far more simplified system, the ‘Office of Tax Simplification’ came into play. Since then, the public sector has taken the brunt of changes, with the off-payroll rules in April 2017, and the public sector assurance rules prior to that in 2012.
This aptly named Office of Tax Simplification (OTS) was made up of treasury officials and tax experts, who were given the reigns of reviewing the whole system regarding IR35. It was as a result of this, that the decision of whether or not to permanently discard or re-vamp and improve the system was put forth. This conclusion was going to greatly influence the future for freelancers and contractors regarding their position in the tax bracket. Contractors and freelancers awaited this important response, and the tax office issued their results on such a vital decision. The IR35 legislation was deemed too important and necessary to scrap, and after administration developments, a new and enhanced legislation was going to be introduced.
This decision was something that has hugely affected contractors and freelancers alike ever since, and it is always helpful to understand when and why legislation was passed in order to fully understand and appreciate them.