As official tax legislation, IR35 was implemented in the Finance Act for April 2000 and has had a significant impact on contractors around the country ever since. The term ‘IR35’ originally came from the press release reference Inland Revenue 35. The legislation has been changing and evolving regularly over the past decade and its growing importance has shown no signs of slowing down.
Why was the IR35 first introduced
The original reasons for the IR35 being introduced in 2000 was to challenge tax and National Insurance Contribution (NIC) avoidance schemes that were using intermediaries, in this case, limited companies and partnerships. This was a large-scale problem at the time, due mostly to the lax system regarding this area of tax, which meant that professional employees could convert their status to that of a limited company or partnership very easily and pretty much in an instant.
The issue with this for the tax office was that these employees were able to decrease the amount of tax they paid considerably, thus increasing the pay they take home tenfold. So, a large number of ‘contractors’ could pose as limited companies even though the majority of them were still in the exact same position as they were when they were employees. This presented the tax office with further problems as to how to identify those named as ‘disguised employees’.
Due to the large number of professionals posing as contractors when they were still employees, the Inland Revenue at the time were panicking and decided something needed to be done about those that were able to become contractors and avoid a significant amount of tax. This is what led to the IR35 being introduced, a way of the treasury being able to see the contractors that were still employees and dodging the tax that they should be paying.
IR35 since 2000
A lot of contractors over the years, since the IR35 was put in place, have criticised it. They have labelled it a poorly thought-out system and an idea that was too hastily introduced, with several attempts being made to scrap it completely, but none of these have been close to being successful.
The IR35 today has evolved with the times and approaches to it vary in many cases, but the fundamental views on it still apply. As discussed in the main article ‘What is IR35?’ which you can check out for more information about the legislation, the latest changes to the IR35 have just come into effect in April 2021.