A brief history of IR35

We’ve written about IR35 before; the tax and National Insurance legislation that affects freelance contractors operating as limited companies. Aimed at uncovering what HMRC terms disguised employment’, it is the legislation on everybody’s lips.

But when and where did IR35 originate and why is it becoming such a key piece of legislation? We’re taking a look back to find out when IR35 entered the political agenda and how it has evolved to become the legislation we know today.

1999

1999. It was the year Prince sung about and Gordon Brown was Chancellor of the Exchequer. As part of the year’s budget, he announced the introduction of measures to crack down on those avoiding tax by working through limited companies while still working in a similar arrangement to a traditional employee.

2000

IR35 became law in April 2000, as part of The Finance Act. The legislation didn’t come in to force until the beginning of the financial year, but the act was backdated. This made its official commencement date 6th April 2000.

Officially known as Intermediaries Legislation, the new regulation came to be commonly known as IR35.

Opposition increases

Since the passing of IR35 into law, the legislation has been hotly debated, garnering much attention and opposition. Several bodies have been particularly vocal in their criticism, including the Professional Contractor Group, a representative organisation for freelance contractors.

Many felt that the legislation was too complex to be applied to a large variety of cases, harmed small companies that weren’t set up for the purpose of avoiding tax and actually enforced higher levels of tax on those found to be within IR35, as they are also liable for Employers National Insurance contributions.

Tax simplification and the coalition government

The Cameron Ministry saw a new Chancellor at number 11 in the shape of George Osborne in May 2010. One of his initial acts as Chancellor of the Exchequer was the creation of the Office for Tax Simplification.

One of the key objectives of the newly formed task force was to put IR35 under review and suggest to Osborne if the legislation should be drastically changed or scrapped altogether. IR35 was deemed far too important to do away with altogether and so a re-vamped version was developed.

The main changes to the law included publishing clear guidelines for freelance contractors, creating a dedicated helpline run by IR35 experts and the creation of a series of business entity tests, designed to provide contractors with an idea of the risks posed should they be selected for an IR35 investigation.

IR35 today

Since the OTS investigation, HMRC have promised to increase the number of IR35 investigations per year while reducing investigation time. There is now a whole industry of professionals that offer IR35 review services to assist freelance contractors in assessing their IR35 position.

The decision to keep IR35 and to enforce it more strongly has had an enormous impact on freelance contractors across the UK. There is no doubt that the legislation is controversial and highly contested and is likely to remain so.

Has your business been effected by the introduction of IR35?

Have you invested in having your contract independently assessed by an IR35 expert?

Tell us about your experiences in the comments below!

Having Professional Indemnity (PI) insurance can improve your IR35 profile. It is an all-important element of cover for businesses, protecting against claims of professional negligence.

Here at KPSol we have designed our core insurance package to cover the most common risks faced by freelance contractors. This includes Professional Indemnity, Public Liability and Employers Liability cover.

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