IR35 Background - IR35 History

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Before the rules were introduced:

Prior to the introduction of the rules, ALL self employed individuals were able to use limited companies to provide services. The self employed person could draw a reasonable salary from his limited company and then draw the balance of the profits earned by his company as dividends.

This was a tax efficient arrangement. Most of the profits of the company would be paid out as dividends (which are not subjected to PAYE), and so these individuals could avoid being taxed as employees and were also able to avoid employer's and employee's Class 1 NIC's. A fair tax break for taking the risk of self employment.

Why the rules were introduced:

IR35 was introduced simply to increase tax revenues to the Treasury - exactly the same reason the Revenue has pursued the Arctic Systems case under section 660A. This is the underlying reason for IR35. However, this is obviously not the government's justification for introducing the rules!

The government and the Revenue argued that those people who we commonly refer to as "contractors" are really employees of their end customer and are not self employed at all. They argued that contractors should therefore be taxed in the same way as normal employees and should not gain a tax benefit from being self employed. Consequently, IR35 was introduced.

In the words of the Revenue:

"The purpose of the new rules (IR35) is to remove opportunities for the avoidance of tax and Class 1 National Insurance Contributions by the use of intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker."

For many contractors (who set themselves up as consultants after losing their jobs), IR35 is a knife in the back after taking the entrepreneurial risk of starting a business.

When the rules were introduced:

The legislation was initially proposed by the Chancellor in his March 1999 Budget. Following the budget the Revenue issued a press release about it - and the number of the press release was "IR35". This is how IR35 got its name.

After further reviews and consultations, final proposals were announced in another press release from the Revenue on 23rd September 1999 and the legislation was finally introduced on 6th April 2000.

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Full index of pages:

Home Page IR35 Background - page 1 IR35 Background - page 2 IR35 Background - page 3

IR35 Rules - page 1 IR35 Rules - page 2 Beat IR35 - page 1 Beat IR35 - page 2

Beat IR35 - page 3 Beat IR35 - page 4 Ltd Company - page 1 Ltd Company - page 2

Ltd Company - page 3 Ltd Company - page 4 Umbrella Companies - page 1

Umbrella Companies - page 2 Composite Companies - page 1 Composite Companies - page 2

Composite Co - page 3 Composite Co - page 4 MSC - page 1 MSC - page 2 IR35 Insurance

IR35 Investigations - page 1 IR35 Investigations - page 2 Contracts - page 1

Contracts - page 2 Contracts - page 3 Resources 1 Resources 2 Resources 2 Sitemap