What is IR35?

In 1999, as part of that year’s budget, the UK’s Chancellor, Gordon Brown, announced that measures would be introduced to counter ‘tax avoidance’ by the use of so called Personal Service Companies. The Inland Revenue (now HMRC) issued its 35th press release of the year on the subject, and IR35 was born.


As a Contractor, your ‘IR35 status’ effectively determines your tax position with HMRC.


The aim of the legislation was to prevent workers from setting up Limited Companies via which they would work effectively as employees but with the Company as the ‘middle-man’, resulting in both the ‘employer’ and ‘employee’ saving on tax.  The aim was to stop the so-called ‘Friday to Monday’ scenario (whereby it was possible for workers to leave employment on Friday and return on Monday to do the same work, for the same Company, but as a Contractor via their own limited Company) and the subsequent paying of significantly less tax.


The initial regulatory impact assessment for IR35 in 1999 stated HMRC expected the measure to generate £220million per year in National Insurance Contributions, and a further £80million in Income Tax.  The introduction of IR35 combined with its complexity and ambiguity, led many freelancers into taking advantage of various available tax planning schemes which led to a further loss of revenue for HMRC.


It is difficult to judge the effectiveness of the legislation, since as of 2010, the UK HMRC have not published any figures.  The July 2009 issue of IT Now, the British Computer Society Magazine, reported that between April 2002 and March 2008 the Government had raised only £9.2 million under IR35 legislation compared to the £220 million that it predicted.


Since then, various Professional Groups and Ministers have been unable to establish how much tax revenue IR35 had in fact raised for the exchequer.  The IR35 legislation appears to have been a big source of embarrassment for HMRC.


So what now?  If you are a Personal Service Company, Agency, Umbrella Company or an Employment Business, then HMRC is coming to get you.   A current HMRC consultation suggests changing the IR35 test, so that any worker subject to the right of supervision, direction or control would be caught out.  From 6 April 2016, George Osbourne, the current Chancellor, is planning to change the rules for tax relief on travel and subsistence expenses, currently available for all workers engaged via intermediaries. This would tighten the screw even further, and may be the end of many Personal Service Companies.