On April 6, 2021, changes are being introduced to the IR35 legislation that impacts the UK private sector. Aiming to ensure tax consistencies for disguised workers within medium and large organisations, these changes will provide new operational challenges for organisations that rely on a contingent workforce.
But where did IR35 begin? And what triggered its inception? Here’s a quick overview of the history of IR35 from its beginnings in 1999 through to the upcoming changes in April 2021.
The Original Announcement | 1999
It all started in March 1999 when the Inland Revenue issued a press release outlining the UK government’s plans to tackle the rise of disguised workers. Inland Revenue explained that these disguised workers are contractors who work alone, under the name of a limited company, to provide professional services to their clients.
Due to corporate structures in place at the time, these workers were able to function in the capacity of a traditional or permanent employee but pay lower rates of tax. While this can be seen to balance out the lack of security and workplace benefits received by independent contractors – this includes sick pay, bonuses and, more recently, pension contributions – these reduced tax rates were considered to be a problem by the UK government.
Following some discussion, another press release was issued six months later which clarified more of a safety net for those who would fall within IR35, such as a 5% expenses allowance. This press release also provided more guidance to help those affected to determine employment status and whether they fall inside or outside of IR35. The second press release is still available and can be viewed online here.
MORE FROM THE BLOG | ‘What Is Changing With IR35?’
IR35 Legislation Is Introduced | 2000
Via the Finance Act 2000, the IR35 legislation became law and has remained so ever since. The change in law was triggered by the rise in use of single-person limited corporations, primarily to help with tech support. As the year 2000 grew closer, many organisations were concerned about the Millennium Bug and a hiring wave of IT consultants and contractors began.
This hiring wave brought the tax loopholes more prominently to the government’s attention as this brought about an increase in what they deemed as missing taxes. When the legislation was brought into law, the onus was on the contractor themselves to determine their employment status within an organisation.
Objections to IR35 | 2001-2010
Shortly after IR35 became law, there were a number of public objections to the law, as it was deemed unfair for contractors and freelancers. These members of the contingent workforce lack the security and benefits of permanent employment, and the tax break that pre-IR35 working practices allowed was considered to compensate for that.
A representative group for contractors and freelancers, the PCG (now known as IPSE), filed for a judicial review of the legislation in 2001. However, the High Court ruled in favour of Inland Revenue in December of the same year.
RELATED READING | ‘4 Reasons to Track Your Independent Contractors in a VMS’
Planned Overhaul of IR35 | 2011
Following the creation of the Conservative-Liberal-Democrat coalition government in May 2010, George Osborne (then Chancellor) created the Office of Tax Simplification (OTS). One of its primary tasks was to review IR35 legislation.
The review led to a number of suggested improvements as well as some demands for change to how the legislation was managed. These demands included setting up a direct helpline manned by specialists in the field, the publication of clear guidelines, and the creation of the IR35 Forum to monitor HMRC’s enforcement of IR35.
In May 2011, Business Entity Tests were introduced by HMRC (formed from a merger between Inland Revenue and Her Majesty’s Customs & Excise in 2005) to give contractors and freelancers an idea of how likely they are to be assessed in an IR35 investigation. However, these tests proved unpopular and were abolished in 2015.
Plan for Improving IR35 | 2015
HMRC released a series of recommendations for improving IR35, largely based on feedback from the Forum. The report, however, was considered by some to have little substance and be little more than a PR exercise.
2015 marked the beginning of discussions that led to the legislative reforms we see taking place this year. With concerns over widespread non-compliance, a discussion document released after the 2015 Summer Budget indicated that non-compliance may cost the Exchequer £430m per year. This figure itself has been contested. However, this began the discussion of shifting responsibility for determining the employment status of contingent workers to the organisations employing them.
HANDPICKED FOR YOU | ‘3 Keys to Determining IR35 [infographic]’
Roll Out of IR35 in the Public Sector | 2017
Announced in the 2016 Budget, the IR35 legislative changes were announced to come into effect in April 2017. From this date, as with the 2021 changes for the private sector, public sector organisations were required to determine the employment status of every member of their contingent workforce.
About one month before this change became law, a new IR35 Employment Status Test was launched. This has since developed into the CEST tool available from HMRC today, although reports on the accuracy of results have been mixed.
Roll Out of IR35 in the Private Sector | 2020-2021
Originally planned to come into law in April 2020 but delayed due to changing priorities during the pandemic, the rollout of IR35 in the private sector is coming on April 6, 2021. This will impact medium and large organisations, with an exemption for small businesses.
The term IR35, although commonly used to refer specifically to the changes coming in 2021, is also widely used to refer to everything we have described here. It’s been 20 years since the legislation was first brought in, and April 2021 sees the last of the biggest changes currently planned to the original law. This time, the responsibility to determine employment status will sit with the employer and no longer with the contingent worker themselves.
If you would like to know more about the upcoming changes, what they mean, and what the small business exemption looks like, have a look at a recent article from our blog.
RECOMMENDED READING | ‘What Is IR35 and Will I Be Impacted?’