Why IR35? The Legislation’s Origins and Developments

IR35 is the common nickname for the more officially branded ‘Intermediaries Legislation’ which was introduced back in 1999 in a release of new tax rules and regulations, and implemented fully in the Finance Act in April 2000. Since then, UK contractors have had to tackle with proving their authenticity to the Revenue in an attempt to maintain their rightful tax benefits.

The legislation was introduced due to the increasing popularity of using an intermediary such as a limited company, in order to significantly reduce a person’s tax bill. There was a gap, a loophole in the tax system, and people were making good use of it. An employee could almost instantly change their status from employee to limited company director and straight away start taking home double their normal pay from tax savings but with no changes to their working habits or conditions (hence the term ‘disguised employee’). It was too good to be true and you’d be hard pressed not to join in on the game, but the unfortunate truth was that it was seen as a tax avoidance scheme and the Revenue had to take action. Enter IR35.

Since its implementation, the legislation has been widely criticised as a poor system created in a panic, which penalises genuine contractors operating via a personal service company. Although the legislation has remained largely unchanged since 2000, there have been a few amendments and improvements over the last few years.

  1. The OTS.
    In July 2010, the Revenue heard the cries that the legislation was over complicated and confusing, and set up the OTS, Office of Tax Simplification. This crack team of tax experts and treasury officials were set to the task of reviewing the IR35 legislation. Fingers were crossed for the removal of the legislation altogether, but deemed too important, improvements were made instead, including more guidance and the introduction of the IR35 Forum and BETs, helping contractors to understand this complicated piece of legislation.
  2. The IR35 Forum.

In May 2011, the IR35 Forum had its first meeting, consisting of a number of status experts, industry bodies and HMRC representatives. The meetings allow for the voicing of concerns, advice for administering IR35 and assistance and debate for improvements. You can access all previous meetings here.

  1. The BETs.
    In May 2012, further efforts were made to assist contractors with understanding IR35 and self-assessing their risk of investigation from HMRC, with the introduction of the BETs, Business Entity Tests. The tests work on a point scoring basis, landing a contractor either in low risk of investigation or medium-high risk. If found to be low-risk, a contractor could provide the relevant information to HMRC and be guaranteed a three-year investigation-free period, providing circumstances remained unchanged. The tests were widely criticised as being wildly unhelpful, as most genuine contractors would naturally land in the medium-high risk category and they could not be used to actually determine employment status. HMRC have taken note of the dissatisfaction and the BETs will be removed as of 6th April 2015 with no plans to replace them. Any three-year guarantees previously issued will still be observed.
  2. The Public Sector.
    From August 2012, the amendment was made for contractors whose end clients are in the public sector, including bodies such as the BBC and NHS. Any public sector contractor with a contract lasting six months or more and earning £220 per day or higher is required to provide their client with assurance that they are applying IR35 correctly. If the client is dissatisfied with the information, they can pass this onto HMRC for potentially further investigation.
  3. The Office Holders.
    In April 2013, an amendment was made from the Finance Bill of the same year, whereby office holders such as interim managers who take on management roles in their client’s business, will have to apply IR35 for tax purposes. This change came about after the realisation that some high-profile senior level management of government bodies were in fact operating through service companies.

Most contractors are still hopeful for the abolishment of the legislation entirely, but with the self-employed workforce continuing to rise and with the expected millions of tax which would be lost to the Revenue as a result, this is highly unlikely to ever happen. Improvements and amendments are likely to continue, however, as a result of the IR35 Forum, as are the number of investigations also expected to continue to rise with four specialist compliance teams currently in operation.

By:(Archived) Jane Hailstone

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