IR35 has been law for over 25 years, but the rules contractors face today have changed significantly since they first took effect in April 2000.
The biggest changes came in 2017 and 2021, when responsibility for deciding a contractor’s IR35 status changed from the contractor’s own limited company to the organisation hiring them.
Here’s how IR35 developed, and why the original rules still apply to some contractors today.
1999 – IR35 is announced
IR35 was announced by Chancellor Gordon Brown in the March 1999 Budget, as part of a crackdown on what the Inland Revenue regarded as tax avoidance through personal service companies.
Why ’35’? It’s simply named after Inland Revenue press release number 35!
The government was concerned that some individuals were working in a similar way to traditional workers but providing their services through their own limited companies, which let them reduce their tax liabilities.
The proposals were controversial from the start, and remain so today.
April 2000 – the original IR35 rules become law
IR35 came into effect on 6 April 2000, placing responsibility for assessing employment status on contractors operating through their own limited companies.
If a contract was inside IR35, the contractor’s company had to calculate and pay the appropriate employment taxes. Contracts outside IR35 continued to be taxed through the company in the usual way.
The rules applied to all contracts, whether the limited company contractor was working for a small business, a multinational, or a government department.
For the next 17 years, contractors themselves were responsible for complying with the IR35 rules.
April 2017 – off-payroll rules in the public sector
The first major change to how IR35 was applied came on 6 April 2017, when the government introduced off-payroll working reforms for public sector organisations.
In a major change from how IR35 operated before 2017, public sector bodies became responsible for deciding whether contractors working through their own limited companies were inside or outside IR35.
For contracts caught by IR35, the organisation paying the contractor’s company, often a recruitment agency, had to deduct Income Tax and employee National Insurance and account for employer National Insurance.
Although the new off-payroll changes were put in place to counter what the government saw as mass non-compliance with IR35, they significantly increased the administrative burden on hiring organisations.
As a result, many public sector organisations became reluctant to hire contractors through limited companies, while others moved towards umbrella company arrangements. These ‘blanket bans’ of limited company workers remain widespread today.
April 2021 – off-payroll rules extend to the private sector
After introducing the reforms in the public sector, the government – maybe inevitably – decided to extend them to private sector businesses.
The reforms came into effect for medium and large private sector clients on 6 April 2021, following a one year delay due to the COVID-19 pandemic.
As with the public sector changes, the end client, not the contractor’s limited company, became responsible for determining IR35 status.
Clients must take reasonable care when deciding a contractor’s status and issue a Status Determination Statement (SDS) explaining their decision.
Contractors can challenge an SDS, and the client must respond within 45 days, although the off-payroll rules provide no independent appeal process.
Importantly, the off-payroll reforms didn’t change the underlying IR35 rules; they changed who determines employment status and who deducts any taxes and pays them to HMRC.
2022 – IR35 reforms are almost repealed
In September 2022, Chancellor Kwasi Kwarteng announced that the 2017 and 2021 off-payroll reforms would be repealed from April 2023. This would have meant a return to the ‘original’ IR35 regime, with limited company directors responsible for operating IR35 once more.
However, the initial celebrations in the contracting world didn’t last long, as on 17 October 2022, new Chancellor Jeremy Hunt reversed the proposed repeal as part of a wider reversal of measures announced in the September mini-Budget.
2024 – changes to prevent double taxation
Another change arrived in April 2024, this time addressing a problem with how HMRC calculated liabilities when a contractor had been incorrectly treated as outside IR35.
Before the offset rules were introduced, a client/fee-payer could have to pay an employment tax bill without accounting for any taxes the contractor or their limited company had already paid on the same contract income.
The new rules were added to reduce the risk of HMRC collecting tax twice on the same income.
How does IR35 work today?
The off-payroll rules changed who determines a contractor’s IR35 status, but the underlying IR35 legislation remains the same.
- Medium and large private sector clients generally decide their contractors’ IR35 status.
- Public sector organisations also determine IR35 status under the off-payroll working rules.
- Small private sector clients are exempt from the off-payroll rules, so the contractor’s limited company remains responsible.
The company-size thresholds are changing following increases introduced under the Companies Act, although the higher limits won’t affect IR35 responsibilities until April 2027 at the earliest.
For contractors, the practical advice remains largely the same as when IR35 first arrived in 2000. Make sure your contract reflects how you actually work, and check who is responsible for determining your IR35 status before accepting a new assignment.
If your client decides you’re inside IR35, check how much tax you’ll pay before agreeing to the rate. You can also challenge a decision if you believe your working arrangements have been assessed incorrectly.
For more on how the rules work, read our main IR35 guide for contractors.
Need help with IR35?
At Bright Ideas Accountancy, we help limited company contractors understand how IR35 affects their finances, including the difference in take-home pay between inside and outside IR35 contracts.
Get in touch for a free consultation to discuss your circumstances.
