The rise and fall (and then rise) of IR35

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The rise and fall of IR35
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The rise and fall (and then rise) of IR35

  • Publish Date: over 1 year ago
  • Author:by Catherine Wallis

A reminder of how it all began … Chapter 8

In the late 1990s HMRC (or Inland Revenue as it was known then) started noticing a trend in employees leaving their employment and setting up limited companies through which to provide the same or similar services to their ex-employers, now known as ‘clients’. The use of this Limited company or intermediary, together with a contract for services, prevented the client from having to operate PAYE, which saved them employer employment costs and allowed for a much more flexible working relationship between the two parties. The individual would no longer accrue employment rights and would typically pay themselves a salary equal to the UK Personal Allowance plus a dividend, which saved them a considerable amount of income tax.

The IR35 rules brought in via The Finance Act 2000 proposed an anti-avoidance measure termed “Intermediaries Legislation”. This imposed a responsibility on anyone providing personal services through an intermediary company to assess their own employment status in the context of the relationship between the contractor and the end user or client.

Over time, HMRC became increasingly dissatisfied with the level of non-compliance and recognising the impracticality of being able to inspect the large number of parties working in this way, they began to consider measures that might assist with redressing the issue and enable them to recoup the PAYE and NICs revenue.

First Up …. the Public Sector

Effective from 6 April 2017, new legislation (in the form of Chapter 10) imposed a responsibility for public sector bodies to review the employment conditions and arrangements of any contractors providing services to them, in the form of a Status Determination Statement (SDS). Essentially they would decide if the contractor was technically an employee or worker and if so, they had a duty to incorporate them onto the payroll. This was not seen as a favourable financial transition to most and consequently, we saw a large movement of professional contractors moving from the Public to the Private Sector, and a real skills shortage as public bodies struggled to attract the experience and skills they needed for high-level transformation projects. The fixed-term contract with PAYE deductions was not such an attractive option.

Next Up…. the Private Sector

Effective from 6 April 2021, following delays due to Brexit and Covid, Chapter 10 was amended to include private sector businesses that were classified as “medium” or “large” according to the general rules in the Companies Act. As with public sector bodies, the onus was on private sector businesses to assess and determine the status and fulfill the qualifying criteria.

The ensuing 18 months….

Widespread uncertainty followed as businesses tried to work out what the ruling meant for them, what an SDS should look like, how the government CEST tool worked and what to do when the outcome was ‘unable to determine’. Fierce negotiations took place with Ltd company contractors who found themselves working in roles ‘Inside IR35’, the financial transition wasn’t easy. Many businesses issued statements refusing to administer any roles Outside IR35, which, as with the Public Sector 18 months earlier, heavily impacted their ability to attract the necessary skills for senior-level business change projects.

From the candidate’s perspective, there were tough decisions to be made as to whether to hold their nerve and seek out the fewer Outside IR35 opportunities or to admit defeat and succumb to the world of PAYE working. Umbrella companies managed to soften the blow in some cases by enabling a Consultancy experience (ie invoicing and some offsetting of expenses) whilst still applying the required tax rules.

By the Summer of 2022 the interim market had settled, businesses had largely worked out what was required and managed to adapt to the new rulings and candidates had settled into their chosen direction.

A very short-term reprieve…

At the time of writing the professional interim world was enjoying the news of the repeal of Chapter 10 due to ‘unnecessary complexity and cost for many businesses’, a popular decision in the business world, putting the onus back on the contractor to assess their own tax status from April 2023. A short-lived reprieve however as within the month, the repeal was scrapped and SDS life continues into next year and beyond.

We will of course update this page with any further changes!

Head spinning, need some advice?

If like many, you have found it challenging to keep up with the reform, the jargon and the pace of change, then please don’t hesitate to get in touch with us to discuss how hiring Professional Interim workers can best work within your organisation.