IR35 History

IR35 Calculator

History of IR35

IR35 or Intermediaries Legislation 35 is a commonly-used term in the vocabulary of UK’s independent contractors. While the original legislation was introduced in 1999, since then it has gone through several changes. In this article, we look at the history of IR35 from 1999 to present date.


The government was increasingly getting worried about individuals using their contractor status to evade taxes. There was a rise in arrangements where employers would resign as full-time employees and join the same company as Limited Company contractors. These contractors continue to perform the same work as before, and their terms of employment remained the same, except that now they were paying less taxes to the government.

In response to this situation, the government issued a press release on 9th March, 1999. The press release described the problem where individuals were working as traditional employees, but paying taxes as per the rates for corporations. In the release, the government had mentioned that the new rules to control this problem will come into effect from April 2000.

You can find the original IR35 press release here.

In May 1999, the Professional Contractor Group (PCG) was formed to contest IR35 proposals.

In September 1999, the government issued another press release. This release was aimed to make the rules for contractors less stringent in comparison to the original press release. The release included some concessions to contractors like a 5% general allowance, which is in existence even today. Also, a proposed certification scheme was withdrawn in the release. In the release, the onus was put on service companies for compliance of rules.

In November 1999, the Welfare Reform and Pensions Bill was passed, which included IR35’s enabling clauses. Also, the Paymaster General clarified the treatment of training expenses under IR35. There was no good news for contractors as training expenses were also assumed to be a part of the 5% general allowance.


On 1st February 2000, the government published the final guidelines for determining the employment status on the Inland Revenue website. This publication added further clarification on the originally-published IR56 test. In February 2000, the government also announced an email service for contractors to get an idea of whether their contracts were inside or outside IR35.

On 7th April 2000, the finance bill was published that included all the essential clauses to convert IR35 into a law as per the Finance Act. IR35 became a law through the Finance Act 2000 (Schedule 12) with retroactive application of taxes.

While the initial idea of IR35 sounded good, what followed was a series of tax-related enquiries to contractors and freelancers. Initially, it seemed the government’s target was only ‘Friday to Monday’ workers, but since time it has become clear that IR35 was targeted towards all contractors and freelancers.

As a result, many people started to question the system, and began doubting its effectiveness. From April 2000, IR35 has been a lot in the news, mainly for negative reasons. Several leading bodies like the CBI and the ICAEW Tax Faculty criticized the IR35. In an ICAEW report, the IR35 scored just 30 out of 100 for ‘good law,’ and didn’t score a single point for fairness.

The common perception, both among general people and industry experts, was the IR35 legislation was brought suddenly without proper planning. People felt the hasty draft was a panic response to the situation of increasing number of non-genuine Limited Company contractors.

Different contractor groups raised their concerns and opposition to IR35. PCG was at the forefront of opposing IR35. In early 2001, PCG challenged IR35 by seeking a judicial review hearing of IR35. However, PCG’s application was dismissed at the judicial review hearing as the high court found that IR35 was in compliance with the European law.

In spite of the negative outcome of the judicial review, the PCG decided to continue its fight against IR35. In August 2001, the PCG members funded an appeal against the high court ruling. In December 2001, there was a judicial review appeal, and the Court of Appeal also ruled against the PCG. So there was no change in IR35.


In January 2002, after the appeal of funds, the PCG announced it will stop using the judicial review approach, and it will start concentrating on case law to deal with IR35. Even after ruling by the Court of Appeal, the opposition to IR35 continued from PCG and other freelancer groups who believed the rules are unfair. Critics were also vocal about the fact that the guidelines issued at that time made it very difficult for individuals to assess their IR35 status.

Since 2002, a number of services have come up to protect contractors from being inside IR35. Some of these services were IR35 advice from employment services experts, IR35 contract reviews, specialized IR35 services from accountants, and so on.

In October 2002, an IR35 case, Lime IT v/s Justin, was ruled in favour of the contractor.

In January 2005, Tories proposed the abolishment of IR35. In May 2005, PCG won a case for freelancer Mike Ansell at the special commissioners.

In August 2007, Conservatives promised to turn back the clock completely on IR35.

In January 2008, in an important IR35 case, Dragonfly Consulting lost 99,000 for being ‘Part and Parcel’ of the client’s organization. One factor that influenced the decision against the contractor was his work was not project-based. Instead the contractor, John Bessell, was available for various other assignments, other than the contracted assignment. In September 2008, Dragonfly lost their IR35 appeal.

After the Coalition Government took power in 2010, one of the earliest announcements made by Chancellor George Osborne was the formation of OTS or Office of Tax simplification. The OTS was asked to look at many things related to simplification of taxes, one of which included improving IR35.


On 10th March, 2011, the OTS offered three possible solutions for IR35 to the government. The first suggestion was to suspend the rule, and completely abolish it. The second suggestion was to create some tests, which helped contractors get better information on their IR35 status. And the third suggestion was to retain it, but change the way in which it was operated.

The first suggestion was ruled out as it could have led to a loss of revenues for the government. So the chancellor decided to retain IR35, but committed to change the way in which the legislation was administered.

Some improvements to IR35, which were included in the 2011 budget, are listed below.

The IR35 Forum

The IR35 forum has representation from diverse groups. The forum comprises of representatives from bodies like Association of Professional Staffing Companies (APSco), Professional Contractors Group (PCG), Research Ethics Committee (REC), Freelancer & Contractor Services organization (FCSA), etc. The forum also includes specialists in employment status, staff from Her Majesty’s Revenues and Customs (HMRC), and representatives of all major accounting bodies like Institute of Chartered Accountants in England and Wales (ICAEW), CIOT (Chartered Institute of Taxation), and ACCA (Association of Chartered Certified Accountants).

The forum first met on 6th May 2011. Till December 2014, the forum has met 9 times, with the latest meeting held on 1 August 2013. You can find details about the forum and the minutes of each meeting on this link.

Ever since the changes announced in May 2011, there has been an increase in the number of new IR35 enquiries. For the year ending April 2013, the number of new IR35 enquiries stood at 256 as opposed to 59 for the year ending April 2012.

Business Entity Tests

As part of simplification, HMRC published the ‘Business Entity Tests’ on its website on May 2011. The business entity tests included a series of common IR35 scenarios. The aim of the business entity tests was to help taxpayers proactively determine their IR35 status, and know the risk of a potential IR35 investigation. However, there has been widespread criticism of the scoring method of these tests as a majority of contractors come under the ‘medium’ or ‘high’ risk category of being inside IR35.


In December 2013, House of Lords Select Committee on Personal Service Companies tried to understand the effectiveness of IR35. The hearing provided some good insights on the standing of IR35 in the government’s scheme of things.

As per HMRC estimates, abolishment of IR35 would have resulted in a loss of nearly £475 million to the Treasury. It was not as if the HMRC collected this amount directly through IR35-related taxes or penalties, but it was believed that IR35 deters a lot of people from saving taxes through illegal means. Because of IR35, people who would have otherwise paid less taxes now pay their fair share of taxes, which boosts the government’s revenues. For example, because of IR35, a large number of contractors work through umbrella companies rather than forming their own Limited companies, which leads to higher National Insurance contributions.

Changes planned from 2015

In October 2014, the HMRC has announced the abolishment of BET tests from 6 April 2015. This resulted from a review by the forum members, which suggested that the BET tests as not being helpful in terms of their original purpose. On the basis of this review, the forum members recommended a withdrawal of the BETs.

From 6 April 2015, the example scenarios and the BETs will be withdrawn. As of December 2014, there are no plans for replacing any of these.


As the history of IR35 suggests, what was once introduced as a rule to catch contractors who were evading taxes became applicable to all contractors, including genuine ones. Since its introduction IR35 has remained unpopular among the contractors. However, as it can be seen, there have been several changes to the original rule and things are better as compared to the original draft of 1999. But even after the changes, no contractor wants to be inside IR35 as the penalties and tax liabilities continue to be very high.

Contractors need to take precaution to ensure their contracts are outside IR35. They can check their IR35 status using the BET scores. While the test is going to be abolished from April 2015, industry experts believe that the criteria for evaluating the IR35 status of contractors is more or less going to be the same even after the abolishment of these tests. The problem with these tests is the score and weightage and not the questions. Most of the questions will continue to be relevant and can help contractors in getting a fair idea of whether they are likely to be inside or outside IR35.

Check out our business entity tests, which present the risk of being inside IR35 in an easy-to-understand and graphical manner.

If you want to know the implications of being inside 35, check out our IR35 calculator to get detailed calculations of how being inside or outside IR35 can impact your take-home pay.

If you are a contractor / freelancer and you are looking to find the right, compliant and tax effective accounting solution then either request a callback on contact us on 0203 137 9246

The IR35 calculator is designed for illustration purposes only. Whilst we aim to deliver high accuracy, we make no guarantees on the accuracy of the financial calculations made.

© IR35 Calculator 2013 - 2024 | Privacy Policy | Terms of Use