The History of IR35

If you’re a contractor or thinking about becoming one you’ve more than likely come across the term IR35. This piece of legislation has evolved somewhat over the past decade and it is crucial to understand how it impacts or potentially impacts your personal income tax.

So, to fully understand IR35 and why it exists, first we need to understand it’s history.

When did IR35 come into existence?

In April 2000, IR35 was legislation created to identify individuals falsely establishing limited companies as a means to reduce national insurance (NI) payments and taxes.

It was first mentioned in a new release of tax rules and regulations in 1999 by the then Chancellor Gordon Brown and originally titled the ‘intermediaries legislation’.

The term ‘IR35’ actually came from the press release reference ‘Inland Revenue 35’.

Why was IR35 established?

Prior to IR35, if you were a software engineer working on a project for a company as an employee and quit on a Wednesday, went away for a few days to create a limited company, and returned to the exact role on a Monday then what were you defined as under the current tax laws? Were you an employee or a freelancer? Was the limited company simply formed to get a tax break? Are you working the same hours and days as before?

Without IR35, it was tricky for HMRC to investigate. Added to the complexity of the situation, HMRC had to investigate the numerous, intricate details of each case. It was difficult for the government to discover the legitimacy, or legality, of a contract.

As a contractor, knowing your contract status is imperative.

There are ways to distinguish if you fall inside or outside IR35. For instance, do you have the power to fire and hire employees at your client’s place of work? If so, then you may be seen as an employee. If you’re off-payroll then you may need to look at your status.

So what changed and how do I know if my contract is IR35 friendly?

Before its creation, a contractor (caught by IR35) worked for a client as a limited company paying a hefty percentage of earnings as dividends and making savings on tax deductions and NI contributions. With this practise, HMRC was left with limited means to dispute the arrangements. It created an unethical system with too many loopholes. This is why IR35 was established.

Unfortunately, there is no black or white test of whether your contract falls under IR35 or not. However we have created this guide to IR35 to help differentiate whether or not your contract is caught.

To summarise:

Knowing IR35 regulations in regards to your business isn’t always straightforward. It strengthens your contracting career to have those on your side who are available to help you through this process. Do not leave yourself open to enquiry, due to misinterpreting any aspect of it.

For more advice or info regarding IR35 and how it may impact your business, contact SG Accounting today.