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What Is IR35?



IR35 is the term given to a piece of tax legislation that aims to distinguish between genuine contractors who provide their services via their own limited company, known as ‘Personal Service Company’ (PSC), and contractors who again provide their services through a PSC, but whose contract and working practices point towards them being more like an employee – giving the term ‘disguised employee’.

Genuine contractors operate ‘outside IR35’, with their working practices and written contract being on an arms-length consultancy arrangement, whilst disguised employees operate ‘inside IR35’, with their working practices and contract consistent with that of an employer-employee relationship.

Genuine contractors usually receive gross payment for their services, via their PSC, which allows them to pay themselves via a small salary and then the rest via dividends – giving them a tax benefit when compared to an employee who gets paid via PAYE. Operating through a PSC can also reduce the amount of National Insurance (NI) payable by the contractor and their PSC, whilst the client is no longer required to pay employers NI.

The difference in tax and NI paid to HMRC if a disguised employee gets away with being such is the issue at stake, and which the IR35 legislation quite rightly seeks to eradicate. Determining IR35 status though is not a simple process, there are no black and white rules, it is based on key status tests and case precedence. This creates a grey area and room for subjectiveness, and the hence the current state of IR35…


The term IR35 itself is shorthand for Intermediaries Legislation, as coined by then-Chancellor Gordon Brown back in 1999 during the pre-budget speech. It was also on the very same day an Inland Revenue (as HMRC was known at the time) bulletin was released in relation to the legislation. It was numbered 35 by the Inland Revenue, and therefore titled ‘IR35: Countering Avoidance in the Provision’, giving IR35 its name.

But why was the Intermediaries Legislation introduced in the first place? Well, the problem originated in how easy it was to change employment status. It was possible for a person to be employed by a company on Friday and return as a contractor on Monday, having set up their own limited company to supply services through in the interim. 

This of course meant that the new contractor was still doing exactly the same job as before with two key exceptions; firstly their take-home pay was significantly increased thanks to not having to pay as much income tax or NI contributions, and secondly the employer now saved the NI contributions as well as staff benefits such as pension, making it a win-win situation. This led to the contractors being referred to as ‘disguised employees’.


The IR35 legislation first became law via the Finance Act 2000 (Schedule 12) and has remained on the statute book ever since. This made it illegal to use a self-employed status to avoid income tax and NI contributions.

Using the three key tests, as well as a host of other factors a contractor was able to set their own IR35 status – known as being either ‘inside’ or ‘outside’ IR35. Being ‘inside’ IR35 is HMRC’s term for a contractor who operates via their own limited company, often known as a Personal Service Company (PSC) who act and are controlled like employees – making them in violation of the legislation. Being ‘outside’ IR35 is where a contractor and their PSC do not violate the IR35 legislation and so are a genuine business, in business on their own account and making their own decisions as to how, where and when they work etc.

The first iteration of the ‘three key tests’ that the current CEST tool is (loosely…) based on were thus identified as:
Control: How much power a business has over how, when, what and where the contractor and their PSC undertake the work.
Substitution: Can a person other than the contractor can complete the work on behalf of the PSC.
Mutuality Of Obligation (MOO): Is the business is obligated to provide work and must the PSC accept it?

OPPOSITION TO IR35: 2001-2010

One of the fiercest opponents of IR35 from the outset was IPSE (then known as the PCG), who demanded a judicial review of IR35 in early 2001. However, the High Court ruled in favour of HMRC, and the contractors’ group lost its appeal in December 2001. In response to this lost appeal, a whole new industry grew around protecting contractors from the effects of IR35, whilst IR35 itself continued on its merry way with almost no changes to it during the next decade.

THE OVERHAUL OF IR35: 2011-2014

When the Tory/Lib-Dem Coalition Government came into office in May 2010, one of George Osborne’s first projects was the Office of Tax Simplification (OTS). The OTS was almost entirely dedicated to improving IR35.  

On 10th March 2011, the OTS provided the Government with three potential solutions to IR35. They were:

– Suspension of the legislation, followed by abolition
– The creation of a series of business tests
– To keep IR35 in place but overhaul the way it is administered.

With significant amounts of revenue at stake, HMRC kept IR35 in place but promised to revise the legislation. The improvements promised were:

– Creating a dedicated helpline staffed by specialists
– Publishing clear guidelines and scenarios to help individuals determine their IR35 status more easily
– Restricting IR35 reviews to high-risk cases
– Creating a new IR35 Forum to monitor HMRC’s improved enforcement of IR35.

HMRC published its new ‘Business Entity Tests’ (BETs) together with a set of typical IR35 scenarios on its website in May the same year. The tests were designed to give participants an idea of the risk they faced of being selected for an IR35 investigation. However, the tests were widely criticised as it became increasingly apparent that most contractors would be at a ‘medium’ or ‘high’ risk of investigation.

After three years of heavy objection by a variety of organisations, HMRC announced in October 2014 that the BETs would be abolished from April 2015.

PR PLAN FOR IR35: 2015 – 2016

In early 2015 HMRC released a list of 32 recommendations on how to improve IR35, which included providing more clarity and guidance for those potentially affected by the legislation.

However, this attracted general scorn from IR35 experts. The recommendations were dismissed as nothing more than a flimsy PR plan and did very little to allay the uncertainty regarding IR35 within contracting.

Following the 2015 Summer Budget, the Government released a document called ‘How to make IR35 more effective in protecting the Exchequer’. For the first time, it was speculated that it may fall to clients to determine the employment status of contractors – an immediately unpopular idea. 

On March 16th 2016, the Government announced that there would indeed be a clampdown on so-called ‘off-payroll working’, but initially just within public sector organisations, which they could of course control.

Draft legislation was published in December 2016, alongside a technical note which explained the practicalities of IR35 enforcement by public sector bodies after April 6th 2017. This note explained that public sector clients would be responsible for their worker’s employment status determination.


A new IR35 online tool, Check Employment Status for Tax (CEST) was launched in early March 2017 with the intention of helping contractors, clients and agents determine IR35 status.

This was quickly followed by the Off-Payroll Rules, which came into effect for the public sector in April the same year. Gone was the ability for a contractor to assess their own IR35 status – instead, it was now the responsibility of the client to decide IR35 status, whilst the tax liability moved from being the responsibility of the contractor to the ‘fee-payer‘.

This left contractors at the mercy of two different businesses to decide their IR35 status. Neither business often had any IR35 knowledge, no budget to source externally, and no system except CEST to assist them determine IR35 status. Not only that, but the fee-paying entities faced a huge tax liability exposure with little to no way of mitigating it. The result… a mass of contractors being told their engagements were inside IR35 due to blanket decisions, a lack of IR35 knowledge, a lack of access to reliable and affordable IR35 status determination systems, risk adverse management decisions and a combination of some or all. Many contractors walked out on engagements, retired, upped their rates – all to the detriment of the industry.

Compounding the above issues was that the accuracy of CEST results were notoriously dire from the outset, with thousands of contractors who had always been determined as outside IR35 suddenly being found as inside and having to pay the price. CEST is continuously criticised still now, despite HMRC remaining firm that the test is fit for purpose. This caused, and still to this day causes, a huge amount of anxiety for contractors.


In the October 2018 Budget, the Chancellor announced an extension of the existing off-payroll working rules to the private sector, effective as of April 2020. This was badly received, especially after the clearly visible effects of the legislation had impacted onto the likes of BBC and NHS contractors.

On March 5th 2019, HMRC published a consultation document for industry professionals to voice their concerns. Despite weighty opposition, it was only due to COVID-19 that saw a delay in rolling out IR35 to the private sector, and only then for 12 months until April 2021. 

It was only a matter of months before tax investigations opened under the new legislation revealed some grievous issues. Many contractors and industry professionals legally challenged the process, application and legislation as a whole, while scores more have protested the unjust nature of IR35 across media platforms.

OFF-PAYROLL WORKING: 2021 to today

April 6th April 2021 saw the ‘Off-Payroll’ working rules come into operation to the private section. This meant that all medium and large sized organisations (according to the HMRC definition) who engage PSCs, as well as any such supply chain between the two parties, need to consider IR35 and apply the rules accordingly.

Whilst very short lived, in September 2022 the then Chancellor Kwasi Kwarteng unexpectedly announced in his mini-budget that the off-payroll legislation was to be repealed, part of a huge multi-billion pound raft of tax cuts. This meant going back to the original IR35 legislation where a contractor assessed and was responsible for their own IR35 status and any tax liabilities. Contractors and the marketplace rejoiced as a result. However, within a month Kwarteng’s tax cuts had seen the UK financial market spiral into disarray, and to such an extent that was replaced by Jeremy Hunt.

Hunt immediately overturned the planned off-payroll legislation repeal, and everything went back to as it was. In a nutshell… a complete shambles. 

And so here we are now