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The Old IR35 Legislation



The original IR35 rules, known as the ‘Intermediaries Legislation’ (contained in Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003) were fairly simple – a contractor providing their services via a Personal Service Company (PSC) set their own IR35 status. In the event that HMRC opened an IR35 status investigation, and at the conclusion of it HMRC deemed the IR35 status was incorrectly applied, and an inside IR35 determination should have been applied rather than outside IR35 one, the contractor and their PSC were left to pay the back tax, penalties and any interest applied by HMRC.  

Under this legislation everything was very simple, each entity in the IR35 labour supply chain knew where they stood and what they had to do – which was pretty much nothing except the contractor/PSC as they bore all responsibility and risk.


It is worth reinforcing the fact that since 2017 and 2021 when the off-payroll working legislation was rolled out (contained in Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003), that IR35 itself has not changed – the application of it has. The key IR35 status tests and case precedence that have been around and in application since the inception of IR35 remain crucial and valid. The changes are to who is responsible for assessing IR35 status, how that is done, and who has the tax liability exposure. 


With the contractor facing the risk of having to pay out the back tax, interest and any penalties deemed due by HMRC at the conclusion of an IR35 status investigation, many contractors chose to purchase IR35 insurance for their PSC to cover that risk.

In the new world under Chapter 10 legislation the contractor does not face the above risk, the fee-payer does. Therefore it is the client or fee-payer, not the contractor/PSC, that needs to and should take insurance out to protect themselves against such HMRC IR35 status investigation and tax liabilities risks – as is available online and payable on a month-by-month basis via the Contractor Compliance Portal.

Contractors can still face investigations under Chapter 8 legislation, as HMRC can go back into previous tax years as well as where PSC’s are still able to decide their own IR35 status via the small companies exemption (where the engagement is with a private sector client classed as small businesses). Contractors can in theory face incurring costs under a Chapter 10 investigation, as HMRC could well involve them in their enquiry, meaning that professional representation is required and ideally from the same people as who are currently defending the case so that a joined up defence is presented.