The full IR35 timeline
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IR35 first mentioned in March 1999
In March 1999, the Inland Revenue issued a press release. Titled ‘IR35', it detailed the Government’s plans to investigate one-person limited companies who, despite being contracted to provide services to companies, were enjoying tax benefits above those of a salaried employee.
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IR35 becomes law in April 2000
IR35 became law via the Finance Act 2000, to great opposition from the PCG (now IPSE). The PCG's appeal was ruled against in favour of Inland Revenue by the High Court. Since 2001, an industry centred around IR35 has developed, featuring everything from tax protection insurers, IR35 contract review services, and recruiters specialising in contract appointments.
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IR35 changed in 2011, the IR35 Forum is created
In 2011, the Coalition Government introduced the OTS (Office of Tax Simplification), which first focused on improving IR35. It introduced a series of business tests (BETs) to simplify IR35 and provide a dedicated helpline staffed by specialists. The IR35 Forum was a novel creation, bringing together recruitment representatives and contracting industry bodies including APSCo, REC, FCSA, and the FSB, as well as accountancy bodies like ICAEW, CIOT and ACCA.
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IR35 uncertainty and issues 2011-2016
Many years of uncertainty and failed policy followed. The Business Entity Tests (BETs) were criticised as being unclear. When self-assessing, most contractors found themselves at a predicted medium or high risk of HMRC investigation, which was inaccurate.
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IR35 ‘Off Payroll’ changes roll out to Public Sector in 2017
So, on Budget Day in 2016, the Government introduced draft legislation featuring a major change to IR35. In the Public sector, the responsibility for determining IR35 status would now fall to the client. If HMRC investigated and found an 'inside' IR35 contractor enjoying 'outside' IR35 tax benefits, the client could be liable for the tax shortfall of unpaid of PAYE and NICs.
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IR35 ‘Off Payroll’ changes roll out to Private Sector in 2021
In 2021, this legislation rolled out to the private sector after a year of pandemic-related delay. Widely criticised for reducing contracting talent pools and limiting available skills, it was an unpopular decision. Many private companies, suddenly faced with a looming responsibility they had no previous experience navigating, took a blanket approach and required all contractors hired to be inside IR35.
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IR35 ‘Off Payroll’ changes make finding contractors difficult
This made true outside IR35 contracting opportunities much more competitive, inflating rates, particularly in the technology and digital space.
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IR35 ‘Off Payroll’ U-Turn October 2022
As of 6th April 2023, the 'Off Payroll' rules were to be abolished. The industry was going to return to 'Chapter 8' IR35, making contractors responsible for determining their own IR35 status. This was scrapped by Jeremy Hunt, and as it stands, IR35 status remains down to the client to determine.
How do I know I’m Inside or Outside IR35?
Confusion over contractors being inside or outside IR35 led to blanket policies. Most companies didn't want to deal with the red tape associated with outside IR35 contracts, so opted to only hire inside IR35 contractors.
What does inside IR35 mean?
Working 'inside IR35' means the contractor's service is - in HMRC's eyes - the same as being directly employed by the client. The contractor will be taxed based on PAYE bands and NIC contributions.
What does outside IR35 mean?
Working 'outside IR35' means the contractor is operating as a separate legal entity to the client; either as a self-employed contractor or as a limited company. They're responsible for their own tax, will pay Corporation Tax instead of Income Tax, and can draw the remainder of their income as dividends.
How do I know if the contract is inside or outside IR35?
There are a few 'tests' HMRC uses in its investigations to determine if a contractor is working inside or outside IR35.
Office Holders
When contractors like interim managers fill roles in a client's business, they must follow IR35 tax rules. An "office holder" is a person in a permanent position that exists independently of the person in it. A job title alone doesn't make someone an office holder unless they perform the role's duties.
Control
The control a client has over a contractor's work is crucial. Contractors should have autonomy in how they perform their services, like a flooring fitter who chooses their own work methods. A self-employed person is less controlled than an employee.
Control must be more than just monitoring or checking work. If a contractor isn't completely controlled by a client, they're not under an employment-level of control.
What, where, when, and how a contractor works are all factors in determining control. Clients shouldn't constantly advise contractors on their tasks or move them between jobs as this indicates employment. Contracts may specify where work is done, and working at a client's premises could suggest control.
A contractor should be able to choose their own work hours and methods, though specialist skills might require some client guidance.
Mutuality Of Obligation (MOO)
Employers provide employees with continuous work and expect them to do it. A self-employed person does contracted work without expecting more. Though MOO is an important IR35 factor, HMRC misunderstandings make it hard to rely on this test alone.
Contractors should be able to leave a contract early. If there's no clear end date or non-mutuality clause, other positive contract elements are needed.
Financial Risk
A self-employed person runs their own business, providing equipment, hiring helpers, investing in management, profiting from good management, and taking financial risks. Financial risk examples include providing your own tools, insurance, indemnifying clients, correcting faulty work, and having responsibilities like VAT registration and licensing.
Right Of Dismissal
Self-employed people usually can't be dismissed unless they breach contract terms. Notice periods may indicate employment, but reasonable ones are defensible. No notice period is a better self-employment indicator, but it's not practical for most commercial agreements.
Part And Parcel Of The Organisation
Contractors shouldn't be integrated into a client's business the way that permanent employees are. They shouldn't be on employee lists, have client-branded business cards, or receive employee benefits. Performance reviews or disciplinary actions for contractors could fail an IR35 assessment.
Exclusive Services
Working only for one client suggests ‘disguised’ employment. Contractors should have the right to work for multiple clients. Long-term work with one client isn't conclusive for employment, but regularly working for the same client could imply a single employment contract.
Intention Of The Two Parties
This "tiebreaker" issue helps determine if a contract is for self-employed services or employment. The intended relationship between the contractor and client can clarify IR35 status if other factors are unclear.
Who’s in charge of IR35 Compliance?
IR35 compliance responsibility has shifted since its introduction in 2000. Today, it depends on the contracting party and client size.
Contractors are responsible for IR35 if:
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They're working with a small private sector client per the Companies Act 2006.
The end client/fee-payer is responsible if:
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They're a public sector client.
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They're a medium or large private sector client per the Companies Act 2006 (effective from 6th April 2021).
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With the off-payroll working rules (public sector in 2017, private sector in 2021), end clients determine IR35 status. Fee-payers must deduct tax and National Insurance for 'inside IR35' cases (private sector: medium-large clients only).
Everyone involved in the contracting chain is responsible for double-checking the contract’s status and sharing the status determination statement. At Big Red, we take extra steps to fully verify a contractor’s IR35 status before proceeding with a placement.
Looking for advice or a new contract appointment?
Visit our ‘For Contractors’ page or get in touch via our contact form.
