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‘IR35’ is the commonly-used term for legislation introduced in 2000 to tackle the misuse of personal service companies (PSCs) for tax avoidance purposes.

The term ‘personal service company’ (PSC) is not defined in law, but is usually taken to mean a limited company, the sole or main shareholder of which is also its director, who, instead of working directly for clients, or taking up employment with other businesses, operates through their own company. For any engagement the client will pay the PSC for the individual’s services without first deducting income tax or employee National Insurance contributions (NICs) as it would for any employee under PAYE.

There are several possible tax advantages to this type of arrangement for the individual, further to the wider potential benefits from freelancing.  First, the range of expenses which the PSC may set against its taxable profits will be much wider than that allowed an employee to set against their taxable income.  Second, there will be a cash-flow benefit in avoiding tax being deducted at source each month.  Third, the individual may be in a position to be paid dividends by their PSC, as an alternative to only being paid earnings as the PSC’s employee, and this form of income would not be subject to NICs.

There are also potential financial benefits for the client organisation to this arrangement: they do not incur employer NICs on the payment they make to the PSC, and do not have to provide various rights and entitlements that employees enjoy (such as holiday pay, sick pay and working time protections).[1]

By the late 1990s there were concerns that PSCs were being widely used to disguise the fact that in many situations individuals were working effectively as their client’s employee, while garnering these tax benefits. To counter this type of tax avoidance in the March 1999 Budget the Labour Government announced it would introduce provisions to allow the tax authorities to look through a contractual relationship, where services provided through an intermediary such as a PSC, but the underlying relationship between the worker and the client had the characteristics of employment. In those circumstances, the engagement would be treated as employment for tax purposes. Initially it was proposed that it would be the responsibility of the client organisation to determine if any engagement met this test.

The proposals proved highly contentious. Many businesses raised concerns as to the potential administrative burden in having to assess each and every contract, as there is no simple statutory test to determining employment status for tax purposes.[2]

After consultation the Labour Government announced a new approach. Intermediaries would be required to assess whether:

  • where a worker provided services under a contract between a client and an intermediary; and,
  • but for the presence of the intermediary, the income arising would have been treated as coming from an office or employment held by the worker under the existing rules used to determine the boundary between employment and self-employment income for tax purposes, if the individual had contracted directly with the client.

If so, the intermediary would be required to account for tax on this payment in just the same way as employee earnings (ie, charge income tax under PAYE and Class 1 NICs).

Provision to this effect was included in the Finance Act 2000 with effect from the 2000/01 tax year.[3] The legislation is commonly called ‘IR35’, after the number of the Budget press notice which first announced this measure.[4]

For the last 20 years IR35 has remained controversial, and many have argued for its abolition. However, although its operation has been reviewed more than once, governments have considered this would pose too great a risk to the Exchequer.

Over the next decade IR35 remained controversial in the freelance community, although the Labour Government consistently opposed calls for it to be scrapped.

In July 2010 the Coalition Government announced the newly-established the Office of Tax Simplification (OTS) would review small business taxation, and this would include exploring “alternative legislative approaches to IR35.”[5]  The OTS completed its report just before the 2011 Budget. It set out several options for reform, including a merger of income tax and NICs which would make IR35 obsolete.  In the absence of major structural change the OTS suggested that IR35 might be suspended with a view to being abolished, or amended to exempt certain businesses, or retained but with certain changes in its application.[6]  In the 2011 Budget the Government announced that IR35 would be retained “as abolition would put substantial revenue at risk,” though its administration would be improved.[7] 

In in its first Budget following the 2015 General Election, the Conservative Government confirmed it would “engage with stakeholders this year on how to improve the effectiveness of existing intermediaries legislation.“[8] A discussion document was published later that month; responses were invited by the end of September 2015. On the matter of compliance, the paper noted, “in 2011/12 around 10,000 people paid tax under IR35, an estimated 10% of those who should have paid tax on at least part of the income their PSC receives under the legislation.”[9] 

One question raised in this document was whether the onus for determining whether IR35 applied or not should be placed on the client, rather than the PSC: “under such an arrangement, those who engage a worker through a PSC would need to consider whether or not IR35 applies (in the same way as they would need to consider whether a worker should be self-employed or actually be an employee), and, if so, deduct the correct amounts of income tax and NICs as they would for direct employees.” The paper also asked for views on whether the tests to determine if IR35 applies could be simplified, “such as requiring an engagement to last a certain minimum amount of time to be considered one of employment.”[10]  

In November 2015 there were reports that the Government was planning a change in these rules so that any contractor whose placement lasted more than a month would have to go onto the client’s payroll as their employee.  However, despite expectations, the Government did not announce major reforms to the rules at this time.

Over this period there have also been concerns about the use of PSCs by senior staff in the public sector, and by contractors working for the BBC.

In 2012 there were concerns about the numbers of senior staff in the civil service being employed through a PSC.  In May the then Chief Secretary to the Treasury, Danny Alexander, gave details of a review of these arrangements, and of changes to the way departments could appoint individuals ‘off payroll’. The Minister also announced a consultation – foreshadowed in the 2012 Budget – on amending IR35: in brief, anyone providing their services through a PSC who had been taken on with a senior, controlling role for their client would be taxed as an employee.[11] In December that year the Government announced it would not proceed with this proposal “because HMRC’s new approach to policing IR35, along with the measures introduced in the public sector this year, are sufficient to prevent the loss through disguised employment in this way.”[12]

There have also been concerns about the numbers of contractors working for the BBC providing their services through their own PSC, and the corporation’s past practice in encouraging individuals to work this way – arguably without giving staff ample warning of the risks of their placement falling under IR35. The issue was considered by the Digital, Culture, Media & Sport Committee as part of its inquiry into BBC pay over 2018‑19,[13] as well as being the subject of an investigation by the National Audit Office over summer 2018,[14] and a report published by the Public Accounts Committee in April 2019.[15]

Since 2014 there have been several initiatives to tackle the misuse of PSCs for tax avoidance, including a reform in the way the IR35 rules work in the public sector.

Several other measures have been introduced to prevent this corporate form being used for avoid tax. First, in the 2014 Budget the Coalition Government confirmed proposals to tackle the use of offshore intermediaries to avoid tax, and to prevent agencies based in the UK using contrived contracts to disguise employment as self-employment.[16] Second, in November 2015 the current Government announced that from April 2016 it would “restrict tax relief for travel and subsistence expenses for workers engaged through an employment intermediary” where the intermediaries legislation applied.[17]

Third, in the 2016 Budget Government proposed that from April 2017 public sector bodies would have new duty to ensure any contractors that they took on were complying with IR35.[18]  A consultation exercise was launched in May 2016, and in the 2016 Autumn Statement the Government confirmed it would proceed with this reform.[19]  It was estimated that this reform would raise around £890m over the period 2017/18 to 2021/22.[20]  At the time the Government ruled out adopting the same approach to the application of IR35 in the private sector, or introducing a new test for applying IR35 based on the length of the contractor’s contract.[21]

Following reforms to the application of IR35 in the public sector, the Government has introduced legislation to make similar changes for the private sector to take effect from April 2021.

With the implementation of the reforms to the operation of IR35 in the public sector, there was considerable speculation that the Government would extend the new duty for contractors’ clients to the private sector at some point.

In the Autumn 2017 Budget the Government announced it would “carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms.”[22] This consultation was launched on 18 May 2018, and closed on 10 August.[23] The consultation paper stated that extending the public sector reform to the private sector is the Government’s lead option, though it noted “public authorities faced challenges in implementing the reform and that this is a concern for businesses and individuals working in the private sector.”[24]

Alongside the consultation document, HMRC also published a short factsheet on the proposed reform,[25] and details of an independent review it had commissioned on the impact of the public sector reforms on client organisations.[26]

In his 2018 Budget the then Chancellor Philip Hammond confirmed that the Government would proceed with this reform, but the new rules would come in from April 2020 and apply to large and medium-sized businesses only.[27] At this time the Government confirmed it would undertake a further consultation on the detailed operation of the new rules. This second consultation was launched on 5 March 2019, and closed on 28 May.[28]

The Government published draft legislation to be included in the next Finance Bill on 11 July 2019, including provisions to this effect, as well as a summary of the responses made to the consultation,[29] and a factsheet summarizing the changes to be made and the Government’s case for reform.[30]

Although IR35 was not a major feature of the 2019 General Election campaign, all of the main parties stated that they would ‘review’ these reforms to IR35.[31] On 7 January 2020 Treasury Minister Jesse Norman, announced a review to “address any remaining concerns from businesses and individuals about how the upcoming reform will be implemented.”[32] The outcome of the review was published on 27 February, when the Government confirmed a number of changes to smooth the implementation of this reform.[33] The Chancellor Rishi Sunak did not mention IR35 in his Budget statement on 11 March 2020,[34] although the Budget report reiterated the Government’s view that, “it is right to address the fundamental unfairness of the non-compliance with the existing rules, and the reform will therefore be legislated in Finance Bill 2020 … as previously announced.”[35]

However, on 17 March 2020 Treasury Minister Steve Barclay announced to the House that the Government had taken the decision to defer the implementation of this reform for one year, to April 2021, “in response to the ongoing spread of Covid-19 to help businesses and individuals.”[36] Provision to this effect is now included in the Finance Act 2020  (specifically section 7 and Schedule 1 of the Act). It is estimated that this reform will raise around £3.8 billion over the period 2020/21 to 2025/26.[37]

Since the passage of this legislation Ministers have opposed any further delay,[38] and HMRC have published details of how it will support affected organisations to comply with these changes. This guidance states, “customers will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there’s evidence of deliberate non-compliance.” Following concerns that contractors who start to pay under IR35 from this April would be assessed for earlier years, the guidance also underlines that HMRC “will not use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021 to 2022, unless there is reason to suspect fraud or criminal behaviour.”[39]


This paper discusses the history to these developments, concluding with a detailed discussion of the most recent proposals to reform IR35.  A second paper looks at the introduction of IR35 and its first years of operation.[40]

Notes : 

[1]     These are characterised as the ‘push’ and ‘pull’ factors driving the growth of PSCs (House of Lords Select Committee on PSCs, Personal service companies, HL Paper 160, 7 April 2014 para 22-38).

[2]     As the Office for Tax Simplification has noted, “employment status is established ultimately by case law but, on an everyday basis, it is up to the business or individual to figure out whether they are employed or self-employed.” (OTS, Employment status report, March 2015 para 2.1).

[3]     HMRC publish guidance on the IR35 rules on

[4]     Inland Revenue Budget press notice IR35, Countering avoidance in the provision of personal services, 9 March 1999

[5]     HM Treasury press notice 29/10 20 July 2010

[6]     OTS, Small business tax review, March 2011 pp5-6. The debate over merging tax and NICs is discussed in: National Insurance contributions: an introduction, Commons Briefing paper CBP4517, 16 December 2019.

[7]     Budget 2011, HC 836 March 2011 para 2.203.

[8]     Budget 2015, HC 264, July 2015 para 2.183

[9]     Intermediaries Legislation (IR35): discussion document, 17 July 2015 p4

[10]    op.cit. p8

[11]    HC Deb 23 May 2012 cc1159-70; HC Deb 23 May 2012 cc67-8WS; HMRC, Consultation into the Taxation of Controlling Persons, 23 May 2012

[12]    Autumn Statement, Cm 8480, December 2012 para 2.103

[13]    DCMS Committee, BBC Annual Report and Accounts 2017/18: Equal pay at the BBC, HC 993, 25 October 2018

[14]    National Audit Office, Investigation into the BBC’s engagement with personal service companies, HC 1677, 15 November 2018

[15]    Public Accounts Committee, BBC and personal service companies, HC 1522, 5 April 2019

[16]    Budget 2014, HC 1104, March 2014 paras 2.194-5

[17]    Autumn Statement, Cm 9162, November 2015 para 3.20; Budget 2016, HC901, March 2016 para 2.39.

[18]    Budget 2016, HC901 March 2016 p43; HMRC, Off-payroll working in the public sector, March 2016

[19]    Autumn Statement, Cm 9362, November 2016 para 4.11. Provision to this effect is included in the Finance Act 2017 (specifically section 6 and Schedule 1).

[20]    HMRC, Off-payroll working in the public sector: changes to the intermediaries legislation, 8 March 2017

[21]    Off-payroll working in the public sector: reform of the intermediaries legislation, May 2016 pp36-8

[22]    Autumn Budget 2017, HC 587, November 2017 para 3.7

[23]    HM Treasury press notice, Government to consult on tax avoidance in the private sector, 18 May 2018. See also PQs 150081-2, 13 June 2018

[24]    HMT/HMRC, Off-payroll working in the private sector: consultation document, May 2018 pp22

[25]    HMRC, Factsheet: off-payroll working in the private sector, updated June 2018

[26]    HMRC, Off-payroll reform in the public sector: HMRC Research Report 487, May 2018

[27]    HC Deb 29 October 2018 c661. see also, HMT/HMRC, Off-payroll working in the private sector: summary of responses, October 2018

[28]    HMRC, Off-payroll working rules from April 2020, March 2019. Treasury Minister Mel Stride made a statement on publication: HC Deb 4 March 2019 cc736-7.

[29]    Written statement HCWS1713, 11 July 2019; HMRC, Rules for off-payroll working from April 2020, 11 July 2019. An updated & revised version of HMRC’s impact note was published on 3 March 2021.

[30]    Subsequently HMRC collated guidance material for members, clients and customers at: HMRC, Off-payroll working rules: communication resources, 19 January 2021

[31]    “Main parties pledge to review IR35 tax reforms after election”, Financial Times, 4 December 2019

[32]    PQs900051-2, 7 January 2019; HM Treasury press notice, Off-payroll review launched, 7 January 2020

[33]    HM Treasury press notice, Government to help businesses with off-payroll working rules, 27 February 2020

[34]    HC Deb 11 March 2020 cc278-293

[35]    Budget 2020, HC 121, March 2020 para 2.178

[36]    HC Deb 17 March 2020 cc905-6

[37]    HM Treasury, Budget 2021: Table 2.2: Measures announced at Spending Review 2000 or earlier that will take effect from March 2021 or later, March 2021 (item e). Annual receipts are estimated to be: £30m (2020/21); £1,020m (2021/22); £590m (2022/23); £650m (2023/24); £725m (2024/25); £805m (2025/26).

[38]    PQ151599, 22 February 2021

[39]    HMRC, Supporting organisations to comply with changes to the off-payroll working rules (IR35): issue briefing, 15 February 2021

[40]    Personal service companies: introduction of IR35, Commons Briefing Paper CBP914, 6 September 2018

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